The Basic Competitive Model - Lecture Notes | EC 205, Study notes of Economics

Download The Basic Competitive Model - Lecture Notes | EC 205 and more Study notes Economics in PDF only on Docsity! Chapter 11 - Lecture Notes November 2, 2006 I. Extending the basic competitive model A. Relaxing our previous assumptions 1. Previously it was assumed that there were many buyers and sellers in the market which made them price takers 2. Though, in the real world firms have some market power a. Firms are not necessarily price takers but instead have some influence over the price they receive Ex. Nike is able to charge more for its shoes than Puma 3. Previously it was assumed that products were homogeneous, though in the real world nonhomogeneous products and brands do exist Ex. Not all shoes are the same, and different brands of shoes have differences in design, quality, etc. B. Imperfect information 1. Consumers and firms rarely have perfect information (remember this was an assumption of the basic competitive model) 2. Consumers do note have perfect information about the quality of goods Ex. Buying a used car, is it a lemon or not 3. Firms do not have perfect information on the productivity of workers Ex. Will he work as hard as he can or just enough so that he doesn't get fired C. Private cost assumption 1. In the basic competitive model it was assumed firms and consumers bare all the consequences of their actions a. There are no spillover effects on other 2. Externalities a. An action by a consumer or firm that has an effect on others for which it neither pays nor is paid compensation Ex. A hiker litters in the woods Ex. A messy roommate Ex. A firm producing electricity from coal releases sulfur into the air D. Rivalrous goods 1. In the basic competitive model we assumed all goods were rivalrous Ex. When one consumer purchases a gallon of gasoline the gallon is unavailable to other consumers 2. Public goods exist in the real world a. Public goods are examples of extreme positive externalities b. Nonrivalrous and Nonexcludable i. Nonrivalrous: one's use of the good does not limit others' use ii. Nonexcludable: There are very high costs to prevent other consumers use of the good Ex. National defense, bridges, fireworks II. Imperfect competition and market structure A. Monopoly 1. A monopoly is firm who is the only seller in the market Ex. The post office has a monopoly on delivering letters to your mailbox Ex. Panama is a monopoly in the South American isthmus canal industry 2. Most times monopolies arise due to barriers to entry Ex. In the United States it is against the law for anyone other then the postal service to deliver mail to consumer's mailboxes, this prevents others from entering the market B. Oligopoly 1. An oligopoly exists when there are a few sellers in the market, the firms are usually large compared to the market Ex. Domestic package shipping, FedEx, UPS, and USPS Ex. Long distance phone providers 2. There is some degree of competition in the market Ex. If UPS lowers its prices FedEx does not have to charge the exact price UPS does but they can not ignore the price drop completely 3. Since there are a relatively small number of firms in the market they will take into account the other firms' actions and reactions when making decisions C. Monopolistic Competition 1. There are many firms in the market but each has some monopoly power due to brand loyalty