Agri 2312 chapter 9 market equilibrium and product price imperfect competition

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward

© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights

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MarketEquilibrium and Market Demand:

Imperfect Competition

Chapter 9



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Discussion Topics

Market structure characteristicsImperfect competition in sellingImperfect competition in buyingMarket structure in livestock industryGovernmental regulatory measures



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Market Structure Characteristics

Number of firms and size distribution

Product differentiation

Barriers to entryPicture here tells a

tale of two markets (no. 2 yellow corn vs. farm equipment)

Pages 145-148



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Perfect Competition

Up to now we have been assuming the firm and market reflect the conditions of perfect competition… farmers come close as anybody to meeting these conditions.

A large number of small firms (2 million farms) A homogeneous product (no. 2 yellow corn) Freely mobile resources (no barriers to entry caused by

patents, etc. or barriers to exit) Perfect knowledge of market conditions (quality outlook

information from government and university sources)



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Merging Demand and Supply

Price

Quantity

D S

PE

QE

Chapters 6-7Chapters 6-7

Chapters 3-5Chapters 3-5Chapter 8Chapter 8



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Firm is a “Price Taker” Under Perfect Competition

Price

Quantity

D S

PE

QE

Price

OMAX

AVC MC

The MarketThe Market The FirmThe Firm



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If Demand Increases……

Price

Quantity

D S

PE

QE

Price

AVC MC


10 11

D1



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If Demand Decreases……

Price

Quantity

D S

PE

QE

Price

AVC MC


9 10

D2



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Firm is a “Price Taker” in the Input Market

Price

Quantity

D S

PE

QE

Price

LMAX

MVP

MIC

Labor MarketLabor Market The FirmThe Firm



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Firm is a “Price Taker” in the Input Market

Wagerate

Quantity

D S

PE

QE

Price

LMAX

MVPMIC




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Effects of Increasing the Minimum Wage

Price

Quantity

D S

PMIN

QD

Price

LMAX

MVP

MIC


QS

Market surplusMarket surplus



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Imperfect Competition

Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions

This chapter initially focuses on specific types of imperfect competitors in the farm input market, where firms are capable of setting the prices farmers must pay for specific inputs to their production.



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Imperfect Competition in Selling



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Unlike perfect competitors who face a perfectly elastic demand curve, imperfectcompetitors selling a differentiated productbenefit from a downward sloping demandcurve

Unlike perfect competitors who face a perfectly elastic demand curve, imperfectcompetitors selling a differentiated productbenefit from a downward sloping demandcurve

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Page 150

See table 11-1 on page 199See table 11-1 on page 199

The marginal revenue in this instance is also downwardsloping, and goes to zero at the point where total revenue peaks

The marginal revenue in this instance is also downwardsloping, and goes to zero at the point where total revenue peaks



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Types of Imperfect Competitors in Input Markets

1. Monopolistic competition

2. Oligopoly

3. MonopolyLet’s start here…Let’s start here…



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Monopolistic Competitors

Many sellersAbility to differentiate product by

advertising and sales promotionsProfits can exist in the short run, but

others bid them away in the long runEquate MC with MR, but price off

the downward sloping demand curve

Page 148-151



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Short run profits. The firmproduces QSR where MR=MC atE above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay

Short run profits. The firmproduces QSR where MR=MC atE above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay

Page 150



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Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E.

Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E.

Page 150



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At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above…

At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above…

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In the long run, profits are bid away as more firms enter the market. Or losses will no longerexist as firms leave the market. At QLR, the remaining firms are just breaking even as shownby the lack of gap between the demand curve and ATC curve.

In the long run, profits are bid away as more firms enter the market. Or losses will no longerexist as firms leave the market. At QLR, the remaining firms are just breaking even as shownby the lack of gap between the demand curve and ATC curve.

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Top 10 Burger Restaurants

Page 152Imperfect competitionyou face weekly

Imperfect competitionyou face weekly



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Oligopolies

A few number of sellersNon-price competition between oligopolistsMatch price cuts but not price increases by

fellow oligopolistsLike monopolistic competitors, they have

some ability to set market prices

Pages 152-155



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Page 154

Demand curve DD representsthe case when all oligopolistsmove prices together and sharethe market.

Demand curve DD representsthe case when all oligopolistsmove prices together and sharethe market.



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Page 154

Why? Rival oligololists will match price cuts but not price increases in the short run because they want to capture a larger market share.

Why? Rival oligololists will match price cuts but not price increases in the short run because they want to capture a larger market share.

Demand curve dd represents the case when a single firm changes its price above Pe at point 1. This leads to a kinked demand curve d1D and a discontinuous marginal revenue curve.

Demand curve dd represents the case when a single firm changes its price above Pe at point 1. This leads to a kinked demand curve d1D and a discontinuous marginal revenue curve.



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Page 154

Meeting demand along the lower segment of the kinked demand curve, the firm is maintaining its market share.

Meeting demand along the lower segment of the kinked demand curve, the firm is maintaining its market share.



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Page 154

Note that shifting MC curves reflecting technological advances will not affect PE and QE. It does affect profit however (MC drops from point 3 to point 4).

Note that shifting MC curves reflecting technological advances will not affect PE and QE. It does affect profit however (MC drops from point 3 to point 4).



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Examples of Oligopolists

Farm machinery manufacturersDomestic automobile industryDomestic airline industryPesticide and fertilizer industry

Products sold are largely identified or differentiated by company brand or name.

Products sold are largely identified or differentiated by company brand or name.



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Monopolies

Only seller in the marketEntry of other firms is restricted by

patents, etc.They have absolute power over

setting market priceThey produce a unique productThey can make economic profits in

the long run because they can set price without competition.

Page 155-156



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Page 156

Total revenue is equalto the area 0PECQE,which forms the bluebox to the left…

Notice the monopoly,like the previous formsof imperfect competition,produces where MC=MR(point A), but then reads up to the demand curve (point C) when setting price PE.

Total revenue is equalto the area 0PECQE,which forms the bluebox to the left…

Notice the monopoly,like the previous formsof imperfect competition,produces where MC=MR(point A), but then reads up to the demand curve (point C) when setting price PE.



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Page 156

Total variable costs forthe monopolist is equalto area 0NAQE, or theyellow box to the left.

Total variable costs forthe monopolist is equalto area 0NAQE, or theyellow box to the left.



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Page 156

Total fixed costs for themonopolist is equal toarea NMBA, or the greenbox to the left…

Total fixed costs for themonopolist is equal toarea NMBA, or the greenbox to the left…



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Page 156

Total cost is therefore equalto area 0MBQE, or thegreen box plus the yellowbox to the left

Total cost is therefore equalto area 0MBQE, or thegreen box plus the yellowbox to the left



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Page 156

Finally, the economic profitearned by the monopolist isequal to area MPECB, ortotal revenue (blue box) minus total costs (green boxplus yellow box).

Finally, the economic profitearned by the monopolist isequal to area MPECB, ortotal revenue (blue box) minus total costs (green boxplus yellow box).



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Page 157

Let’s compare a monopoly with perfect competition from aneconomic welfare perspective



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Page 157

Consumer surplus underperfect competition isequal to the sum of areas1, 4, 5, 8 and 9, or the blue triangle to the left

Consumer surplus underperfect competition isequal to the sum of areas1, 4, 5, 8 and 9, or the blue triangle to the left

Perfect Competition CasePerfect Competition Case



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Page 157

Producer surplus underperfect competition isequal to the sum of areas2, 3, 6 and 7, or the green triangle to the left

Producer surplus underperfect competition isequal to the sum of areas2, 3, 6 and 7, or the green triangle to the left




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Page 157

Total economic surplus under perfect competitionis therefore equal to theblue and green triangles to the left, or the sum of areas 1 through 9.

Total economic surplus under perfect competitionis therefore equal to theblue and green triangles to the left, or the sum of areas 1 through 9.




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Page 157

Consumer surplus undera monopoly is equal to the sum of areas 8 and 9,or the new blue triangle to the left

Thus, consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price PM for a smaller quantity QM.

Consumer surplus undera monopoly is equal to the sum of areas 8 and 9,or the new blue triangle to the left

Thus, consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price PM for a smaller quantity QM.

Monopoly CaseMonopoly Case



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Page 157

Producer surplus underA monopoly is equal to the sum of areas 3, 4, 5,6 and 7, or the green area to the left.

Thus, producers lose area2 but gain areas 4+5, makingthem economically better-offthan perfect competitors

Producer surplus underA monopoly is equal to the sum of areas 3, 4, 5,6 and 7, or the green area to the left.

Thus, producers lose area2 but gain areas 4+5, makingthem economically better-offthan perfect competitors




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Page 157

Finally, society as a wholewould be economically worse-off by areas 1+2. Thisis called a dead weight loss.

This reflects the fact thatless of the economy’savailable resources inthis market are being usedto provide products to consumers….

Finally, society as a wholewould be economically worse-off by areas 1+2. Thisis called a dead weight loss.

This reflects the fact thatless of the economy’savailable resources inthis market are being usedto provide products to consumers….




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Summary of imperfect competitors from a selling perspectiveSummary of imperfect competitors from a selling perspective

Page 157



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Imperfect Competition in Buying



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Types of Imperfect Competitors on the Buying Side

1. Monopsonistic competition

2. Oligopsony

3. MonopsonyLet’s start here…Let’s start here…



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Monopsonies

Single buyer in the marketFocus is on the marginal input cost

of purchasing an addition unit of resources

Will equate MVP=MIC when making buying decisions

As long as MVP>MIC, the monopsonist makes a profit

Page 158-160



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Page 160

Marginal revenue product same as marginal value product under perfectcompetition.

Marginal revenue product same as marginal value product under perfectcompetition.

Buying Decisions by Perfect CompetitorsBuying Decisions by Perfect Competitors



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Page 160

Buying Decisions by Perfect CompetitorsBuying Decisions by Perfect Competitors

Review graph onpage 161 inChapter 7 for morebackground on theMVP=MIC concept

Review graph onpage 161 inChapter 7 for morebackground on theMVP=MIC concept



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Page 160

Buying Decisions by a MonopsonistBuying Decisions by a Monopsonist

Monopsonist makes decesionsalong the marginal reveuveproduct curve, which now differsfrom MVP. The firm willequate MRP=MIC at point Aand decide to buy quantity QM

Monopsonist makes decesionsalong the marginal reveuveproduct curve, which now differsfrom MVP. The firm willequate MRP=MIC at point Aand decide to buy quantity QM



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Page 160

Buying Decisions by a MonopsonistBuying Decisions by a Monopsonist

This causes price tofall from PPC to PM which is referred toas monopsonisticexplotation.

This causes price tofall from PPC to PM which is referred toas monopsonisticexplotation.



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Page 161

Case #1: Monopsonist in buying and sole seller of product.

Equilibrium is whereMRP=MIC at Point A.Pricing off supply curvegives QMM and PMM.

Case #1: Monopsonist in buying and sole seller of product.

Equilibrium is whereMRP=MIC at Point A.Pricing off supply curvegives QMM and PMM.



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Page 161

Case #2: Perfect competition in buying but monopoly in selling.

Equilibrium is whereMRP=Supply at Point Cwhich gives QPCM and PPCM.

Case #2: Perfect competition in buying but monopoly in selling.

Equilibrium is whereMRP=Supply at Point Cwhich gives QPCM and PPCM.



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Page 161

Case #3: Perfect competition in selling but monopsony in buying.

Equilibrium is whereMVP=MIC at Point E.Pricing off supply curvegives QMPC and PMPC.

Case #3: Perfect competition in selling but monopsony in buying.

Equilibrium is whereMVP=MIC at Point E.Pricing off supply curvegives QMPC and PMPC.



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Page 161

Case #4: Perfect competition in both selling and buying.

Equilibrium is whereMVP=Supply at Point Fwhich gives QPC and PPC.

Case #4: Perfect competition in both selling and buying.

Equilibrium is whereMVP=Supply at Point Fwhich gives QPC and PPC.



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Monopsonistic Competitors

Many firms buying resources Ability to differentiate services to

producersDifferentiated services includes

distribution convenience and location of facilities, willingness to provide credit or technical assistance

P and Q determined same as monopsonist

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OligopsoniesA few number of buyers of a

resourceProfit earned will depend on

elasticity of supply for resource (less elastic than monopsonistic competition

Each oligopsonist knows fellow oligopsonists will respond to changes in price or quantity it might initiate

P and Q determined same as monopsonist

Page 161



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Page 162

Various segments of the livestock industryExhibit several forms of imperfect competition.

Various segments of the livestock industryExhibit several forms of imperfect competition.



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Governmental Regulatory Measures

Various approaches have been taken over time to Counteract adverse effects of imperfect competitionIn the marketplace. These include

1.Legislative acts passed by Congress, including the Sherman Antitrust Act2.Price ceilings3.Lump-sum Tax4.Minimum price or floors

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#1:Legislative Acts

Sherman Antitrust ActPackers and Stockyards Act Cooperative Marketing ActRobinson-Patman ActAgricultural Marketing Agreement

Act



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#2: Implications of a Price Ceiling#2: Implications of a Price Ceiling

Without regulatory interference, the monopolist will equate MR and MC at point C, produce QM

and charge price PM.

Without regulatory interference, the monopolist will equate MR and MC at point C, produce QM

and charge price PM.



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Page 164


The monopolist’s profit isequal to APMBC or theblue box to the left.

The monopolist’s profit isequal to APMBC or theblue box to the left.



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Page 164


If government imposes aprice ceiling PMAX, thedemand curve is given byPMAXED. This is also MRup to Q1. Beyond Q1, FGbecomes the MR curve.

If government imposes aprice ceiling PMAX, thedemand curve is given byPMAXED. This is also MRup to Q1. Beyond Q1, FGbecomes the MR curve.



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Page 164


The price ceiling has theeffect of of causing themonopolist to producemore (Q1>QM) at a lowerprice (PMAX<PM).

The price ceiling has theeffect of of causing themonopolist to producemore (Q1>QM) at a lowerprice (PMAX<PM).



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Page 164


The monopolist’s profitfalls to area IPMAXEH orgreen box above.

The monopolist’s profitfalls to area IPMAXEH orgreen box above.



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Page 165

#3: Implications of Lump-Sum Tax#3: Implications of Lump-Sum Tax

The monopolist equatesMC=MR at point F, producing QM, and readingup to the demand curve atpoint B and charging PM.

The monopolist equatesMC=MR at point F, producing QM, and readingup to the demand curve atpoint B and charging PM.



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Page 165


The lump-sum tax on themonopolist raises the firm’saverage total costs fromATC1 to ATC2. This lowersthe monopolist’s producersurplus from APMBC toEPMBT, but does not changeits level of output or price.




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Page 165




The loss in producersurplus is area AETCor blue box above.

The loss in producersurplus is area AETCor blue box above.



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#4: Implications of Minimum Price#4: Implications of Minimum Price

Without a minimum price,the monopsonist would equateMRP=MIC and employ QM

units of the input and pay PM.

Without a minimum price,the monopsonist would equateMRP=MIC and employ QM

units of the input and pay PM.



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Page 166

#4: Implications of Minimum Price#4: Implications of Minimum Price

If a minimum price PF is imposed (think of a minimum wage rate), the monopsonist’sMIC curve would be PFDCB.Here the firm would actuallyemploy more of the resource.

If a minimum price PF is imposed (think of a minimum wage rate), the monopsonist’sMIC curve would be PFDCB.Here the firm would actuallyemploy more of the resource.



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SummaryUnlike perfect competition, imperfect

competitors have ability to influence price.Monopolistic competitors try to differentiate

their product.Monopolists are the only seller in their

product market. Monopsonists are the only buyer.

Oligopolies are a few number of sellers while oligopsonies are a few number of buyers.

Know the economic welfare implications of imperfect competition.



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Chapter 10 focuses resource use in agriculture and the environment….

Business

Agri 2312 chapter 9 market equilibrium and product price imperfect competition