Agri 2312 chapter 9 market equilibrium and product price imperfect competition
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Transcript of 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
Reserved.
MarketEquilibrium and Market Demand:
Imperfect Competition
Chapter 9
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Discussion Topics
Market structure characteristicsImperfect competition in sellingImperfect competition in buyingMarket structure in livestock industryGovernmental regulatory measures
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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)
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Merging Demand and Supply
Price
Quantity
D S
PE
QE
Chapters 6-7Chapters 6-7
Chapters 3-5Chapters 3-5Chapter 8Chapter 8
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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Firm is a “Price Taker” Under Perfect Competition
Price
Quantity
D S
PE
QE
Price
OMAX
AVC MC
The MarketThe Market The FirmThe Firm
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
If Demand Increases……
Price
Quantity
D S
PE
QE
Price
AVC MC
The MarketThe Market The FirmThe Firm
10 11
D1
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
If Demand Decreases……
Price
Quantity
D S
PE
QE
Price
AVC MC
The MarketThe Market The FirmThe Firm
9 10
D2
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Firm is a “Price Taker” in the Input Market
Wagerate
Quantity
D S
PE
QE
Price
LMAX
MVPMIC
Labor MarketLabor Market The FirmThe Firm
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Effects of Increasing the Minimum Wage
Price
Quantity
D S
PMIN
QD
Price
LMAX
MVP
MIC
Labor MarketLabor Market The FirmThe Firm
QS
Market surplusMarket surplus
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Imperfect Competition in Selling
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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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
Page 150
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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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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Types of Imperfect Competitors in Input Markets
1. Monopolistic competition
2. Oligopoly
3. MonopolyLet’s start here…Let’s start here…
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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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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
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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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
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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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…
Page 150
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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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.
Page 151
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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Top 10 Burger Restaurants
Page 152Imperfect competitionyou face weekly
Imperfect competitionyou face weekly
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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).
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
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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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.
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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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.
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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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…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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).
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 157
Let’s compare a monopoly with perfect competition from aneconomic welfare perspective
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Perfect Competition CasePerfect Competition Case
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Perfect Competition CasePerfect Competition Case
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
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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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
Monopoly CaseMonopoly Case
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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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….
Monopoly CaseMonopoly Case
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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Summary of imperfect competitors from a selling perspectiveSummary of imperfect competitors from a selling perspective
Page 157
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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Imperfect Competition in Buying
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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Types of Imperfect Competitors on the Buying Side
1. Monopsonistic competition
2. Oligopsony
3. MonopsonyLet’s start here…Let’s start here…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
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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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
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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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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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
Page 161
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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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
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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Page 162
Various segments of the livestock industryExhibit several forms of imperfect competition.
Various segments of the livestock industryExhibit several forms of 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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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
Page 162
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
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#1:Legislative Acts
Sherman Antitrust ActPackers and Stockyards Act Cooperative Marketing ActRobinson-Patman ActAgricultural Marketing Agreement
Act
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
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Page 164
#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.
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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Page 164
#2: Implications of a Price Ceiling#2: Implications of a Price Ceiling
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.
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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Page 164
#2: Implications of a Price Ceiling#2: Implications of a Price Ceiling
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.
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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Page 164
#2: Implications of a Price Ceiling#2: Implications of a Price Ceiling
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).
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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Page 164
#2: Implications of a Price Ceiling#2: Implications of a Price Ceiling
The monopolist’s profitfalls to area IPMAXEH orgreen box above.
The monopolist’s profitfalls to area IPMAXEH orgreen box above.
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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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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 165
#3: Implications of Lump-Sum Tax#3: Implications of Lump-Sum Tax
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.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 165
#3: Implications of Lump-Sum Tax#3: Implications of Lump-Sum Tax
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.
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.
The loss in producersurplus is area AETCor blue box above.
The loss in producersurplus is area AETCor blue box above.
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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Page 166
#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.
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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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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Chapter 10 focuses resource use in agriculture and the environment….