Embedded Files
--THINK AHEAD/"DO-NOW!"--
↓
↓
"Now, briefly explain your reasoning for your choices..."
↓
↓
"Let's get a bit more specific about the defining characteristics of each of these markets..."
↓
↓
↓
↓
"Now if I told you that a market in which firms have no market power is called 'perfectly competitive,' which of the markets mentioned above would come the closest?"
--DEFINITION--
--DEFINITION--
'PERFECT COMPETITION' as the name suggests, refers to a MARKET STRUCTURE, in which an individual firm has 'NO PRICE SETTING ABILITY' at all. For this statement to be true, the following assumptions need to be made:
--ASSUMPTIONS--
--ASSUMPTIONS--
"To understand this type of market in action, let's apply the assumptions of the model to the 'ride-hailing market' and see how this impacts the market power of an individual driver."
--LARGE NUMBER OF FIRMS--
"Can you think why having a large number of buyers and sellers reduces market power?"
↓
↓
↓
"Not sure?" "Think about what a seller in a market with only a few large suppliers, like OPEC in the market for crude oil (currently supplying 40% of the world's crude oil production), can do to the market price?"
↓
↓
↓
"That's right! If a firm's output is a significant portion of the total market supply (like OPEC in the market for petroleum), then by reducing or increasing supply, they can in fact impact the market price; hence, they would have market power. HOWEVER, in this model, they are so INSIGNIFICANT IN SIZE that their supply decisions have no noticeable impact on market supply; hence, they have no market power.
↓
↓
--TASK--
Now you are going to apply this to the ride-hailing driver scenario mentioned earlier and 'Explain to what extent a ride-hailing driver works in a perfectly competitive market.'
"A ride-hailing driver operates in a (relatively) perfectly competitive market and thus has no market power, firstly because the ride-hailing market is made up of a huge number of buyers and sellers, in the form of the numerous people who want a taxi at all times of the day and the vast number of drivers who are offering their vehicles for hire on the apps. This fact means that a single driver only has a tiny market share and therefore cannot reduce their services and influence market supply and alter price."
--ALL PRODUCTS ARE IDENTICAL--
"Can you think why all firms producing identical products ('homogenous goods') reduces market power?"
↓
↓
↓
"Not sure?" "Think about how Starbucks is able to charge a higher price for coffee compared to McCafe."
↓
↓
↓
"That's right! As in the case of Nike, they are able to DIFFERENTIATE themselves from their rivals, by offering slightly different styles and varieties and therefore produce HETEROGENOUS products, which gives them a UNIQUENESS that allows for some loyalty and market power; whereas, if the goods are identical, then any attempt to raise the price will result in all demand disappearing to an identical and cheaper rival; hence, they have no market power.
↓
↓
↓
--TASK--
Now continue to apply this to the ride-hailing driver scenario...
"...furthermore the fact that all cars are identical means..."
--NO BARRIERS TO ENTRY & EXIT--
"Can you think why having 'very low barriers to entry and exit' reduces market power?"
↓
↓
↓
"Not sure?" "Why do you think certain tech and pharmaceutical companies can dictate their prices for many years without anyone challenging them?" "Why is it that when avocados became a popular 'superfood,' they started to be sold at every stall in the wet market?"
↓
↓
↓
"That's right! In the case of tech firms, they hold intellectual property rights that prevent others from entering and 'competing away' their profits so they can keep prices high; however, in the case of avocados, it would be relatively easy and cheap for rival stalls, or even new entrants, to also start selling avocados, which would eventually 'compete away' the extra profits, and the price would fall back to a more competitive level; hence, they have no market power.
↓
↓
↓
--TASK--
Now continue to apply this to the ride-hailing driver scenario...
HINT: "Think about what actually happens when there is 'surge pricing.' How do other drivers react?"
"...in addition, the fact that the barriers to entry into the hail-riding market are so low as you only need....means.."
--PERFECT RESOURCE MOBILITY--
"Can you think why having 'perfect factor mobility' reduces market power?"
HINT: "It's related to the last assumption."
↓
↓
↓
"Not sure?" "Think about the reason why a viral toy or gadget like Labubu dolls can be replicated so easily and sold on TAOBAO or why bubble tea shops keep popping up everywhere."
↓.
↓
↓
"That's right! Makers of most manufactured goods use machines and labour resources that can easily switch from unpopular products to more popular ones at the 'flip of a switch'; similarly, it's not that difficult for an entrepreneur to obtain bubble tea-making machines, ingredients, and staff; hence, any profits will again be competed away in the future, meaning they have no market power.
↓
↓
↓
--TASK--
Now continue to apply this to the ride-hailing driver scenario...
HINT: "Think about what actually happens when the growing incomes of these drivers start to get common knowledge ?"
"...furthermore not only are the barriers of entry low, there are many owners of...."
--PERFECT INFORMATION--
"Can you think why having 'perfect information' reduces market power?"
↓
↓
↓
"Not sure?" "Think about why you always buy an iPhone, rather than a Samsung Galaxy." "Is it because you know exactly what you are getting in terms of specs and quality of build and internal parts?" "Do you really know the quality and value for money of ALL competing products out there, in order to make a rational choice to pay?"
↓.
↓
↓
"That's right! Many producers use advertising and consumers' 'bounded rationality' to baffle them with ads and framing bias to manipulate perceptions of quality and charge a premium price. However, if consumers knew everything about all products quality and pricing, then it would be impossible to 'hoodwink' them, as such, they would have no market power.
↓
↓
↓
--TASK--
Now continue to apply this to the ride-hailing driver scenario...
HINT: "Think about what would happen if a driver announced that he was the safest driver in HK and charged a higher price on the app. Would anyone pay more?"
"...Finally, the fact that thir services are all via the app, all customers can immediately...."
--SR PROFIT DIAGRAMS--
--SR PROFIT DIAGRAMS--
--A PC firm's AR and MR curves--
--A PC firm's AR and MR curves--
We can see that as the INDIVIDUAL FIRMS HAVE NO MARKET POWER they MUST ACCEPT THE INDUSTRY DETERMINED PRICE, hence they are referred to as 'PRICE TAKERS'.
In other words, if they raise their price they will lose ALL quantity demanded, and they have no reason to lower price as they can sell all their output at a higher price anyway.
--ECONOMIC. PROFIT in the SHORT-RUN--
--ECONOMIC. PROFIT in the SHORT-RUN--
In the SR it is possible for some firms to make abnormal profits. If we assume a fixed market supply in the SR, a rise in demand will lead to a rise in the market price, as we know in the SR FIXED FACTORS will PREVENT NEW FIRMS FROM ENTERING, hence existing firms with lower average costs can take advantage and earn abnormal profits. [AR>AC]
--NORMAL PROFIT in the SHORT-RUN--
--NORMAL PROFIT in the SHORT-RUN--
--INDUSTRY-- --FIRM--
--LOSSES in the SHORT-RUN--
--LOSSES in the SHORT-RUN--
In the SR it is also possible for a firm to make losses. If we assume a fixed market supply in the SR, a fall in demand will lead to a fall in the market price, and in the SR FIXED FACTORS will PREVENT ANY FIRMS FROM EXITING, hence existing firms will have to suffer losses.
--INDUSTRY-- --FIRM--
--TO SHUTDOWN OR NOT?--
--TO SHUTDOWN OR NOT?--
We have just seen that firms can be making losses in the SR and in many cases, they have fixed costs that must be repaid regardless of whether they shut down now or remain open until they can exit the market after paying off these obligations in the LR.
So do they simply shut down? Have you ever seen a shop that is usually empty remain open? Why do you think this is? Surely they are losing money right?
--THINK AHEAD--
"For ride-hail drivers (e.g., Uber drivers), whenever there is 'surge pricing' due to a rapid increase in demand, abnormal profits can be earned by the current logged-in drivers, but what eventually happens to these extra profits?"
↓
↓
↓
↓
"That's right! All the other drivers who were not willing to provide their services at the lower prices see the higher rewards on offer on the app (perfect info) and then quickly offer their services (low barriers to entry), increasing supply, and eventually 'competing away' the higher surge pricing, resulting in a fall in price."
--LR PROFIT DIAGRAMS--
--LR PROFIT DIAGRAMS--
--SR Ab. PROFIT & LR NORMAL PROFIT--
--SR Ab. PROFIT & LR NORMAL PROFIT--
In the long run, if an industry has opportunities for abnormal profits firms that are now able to make all their factors variable, will ENTER THE PROFITABLE MARKET, which will as a result INCREASE MARKET SUPPLY gradually LOWERING THE PRICE LEVEL. and competing away abnormal profits until all remaining firms earn only normal profits.
--SR LOSSES & LR NORMAL PROFIT--
--SR LOSSES & LR NORMAL PROFIT--
As soon as loss-making firms are able to make all their factors variable they will EXIT THE MARKET, which will in turn DECREASE MARKET SUPPLY gradually RAISING THE PRICE LEVEL.
As the price level rises only firms that are able to cover their costs at the new price level and thus earn normal profits will remain.
--A PC firm in LONG-RUN EQUILIBRIUM--
--A PC firm in LONG-RUN EQUILIBRIUM--
--EFFICIENCY DIAGRAMS--
--EFFICIENCY DIAGRAMS--
--ALLOCATIVE--
--ALLOCATIVE--
ALLOCATIVE EFFICIENCY occurs when firms produce the particular combination of goods and services that consumers mostly prefer. This is also known as the 'SOCIALLY OPTIMAL' level where supply (MC) = demand (AR)
--PRODUCTIVE--
--PRODUCTIVE--
PRODUCTIVE EFFICIENCY occurs when production takes place at the LOWEST POSSIBLE AVERAGE COST (ATC). This occurs where the ATC = MC.
--EFFICIENCY IN THE SR--
--EFFICIENCY IN THE SR--
--INDUSTRY-- --FIRM--
--EFFICIENCY IN THE LR--
--EFFICIENCY IN THE LR--
--INDUSTRY-- --FIRM--
--EVALUATION--
--EVALUATION--
--INSIGHTS--
--INSIGHTS--
ALWAYS ALLOCATIVLY EFFICIENT as the profit max quantity is always where MC=AR, hence maximising social surplus w/o DWL.
LOW PRICES FOR CONSUMERS in the LR, once abnormal profits are competed away, the price falls.
NO INEFFICIENT FIRMS as all high cost producers are forced to leave the market.
Responds to consumer tastes in LR.
--LIMITATIONS--
--LIMITATIONS--
UNREALISTIC ASSUMPTIONS, in the first place.
FIRMS ARE TOO SMALL TO TAKE ADVANTAGE OF ECONOMIES OF SCALE, which means they are unable to lower their average costs, which in turn leaves less chance of a price reduction for consumers.
LACK OF PRODUCT VARIETY, as all goods are homogenous.
UNABLE TO ENGAGE IN R&D to make new products as they are unable to make any abnormal profits.
--TASK--
--TASK--
--EXPLAIN WHY FIRMS IN PERFECT COMPETITION IS UNABLE TO SUSTAIN ECONOMIC PROFITS IN THE LONG RUN (DEFINITIONS, ASSUMPTIONS, AND DIAGRAMS NEEDED) [10 MARKS]--
--ASSESSMENT--
--ASSESSMENT--
WWW.EDULASTIC.COM
Does pc really exist?
Does pc really exist?
--THINK AHEAD/"DO-NOW!"--
To understand what makes a market 'perfectly competitive,' it is much easier to first identify those characteristics of an 'imperfectly competitive' market and compare; so let's look at the market power ('price-setting ability') of international schools in Hong Kong!"
Ask yourself:
"Are there loads and loads of similar schools available?"
"Are each school exactly the same (e.g., location, facilities, programs, etc.)?"
"Is it really easy to enter and set up a school?"
"Are school buildings and qualified teachers readily available?"
"Can parents accurately judge the?"
"Ask yourself this about your school: Do they operate in a market of hundreds of small schools that produce exactly the same product, such as qualifications, facilities, and location, that consumers all know are identical in quality, that can't get any competitive advantage over their rivals; that produce exactly the amount of units that maximize your profits, which is just enough to stop them from leaving and doing your second highest-paying job, and you can sell out at the market price every day."
"Do you have any market power?"
↓
↓
↓
↓
"No! If they raise their price, they will lose all their customers to a rival, and lowering their price would be irrational, as they can sell out at the market price."
--TASK--
Summarise
"Now, explain your reasoning for your choices in terms of...."
"Are there loads and loads of similar schools available?"
"Are each school exactly the same (e.g., location, facilities, programs, etc.)?"
"Are there many barriers to entering and setting up a new school?"
"Are school buildings and qualified teachers readily available?"
"Can parents accurately judge the?"
Page updated
Google Sites
Report abuse