PERFECT COMPETIT ION, MONOPOLY, OL IGOPOLY

Market scenarios

PERFECT COMPETITIO

N

Also called “perfectly competitive market”

It is an industry in which:1. There are many suppliers (firms)2. There are many buyers.3. Products are standardized or

homogeneous.4. There are no restrictions on entry

into the industry or leave the market.

5. Established firms have no advantage over new ones.

6. Sellers and buyers are well informed about prices and take those as “given”

Do you think this model is not very realistic?

Well, YOU ARE RIGHT!Even though most of the firms have some

flexibility over their prices, this is a good way to start analyzing firm’s decisions F.i. When a firm increases its price slightly it will

certainly sell less, but the quantity sold will probably not drop to zero.

Remember, firms don’t have to pick a price, they just decide how much to produce.

Monopoly

An industry or firm that:1. Produces a good or service

for which no close substitute exists

2. It is protected by a barrier that prevents other firms from selling that good or service.

Legal.- Public franchise, a license or patent, firms owns control of a resource.

Natural.- In which some factors enable one firm to supply the entire market at the lowest possible cost.

Even in industries with more that one producer, firms often have a degree of monopoly power.

f.i. Microsoft in the Windows operation system today.

Oligopoly

A market structure in which:1. Natural or legal barriers

prevent the entry of new firms.

2. A small number of firms compete.

3. Slightly differentiated goods4. Firms

make decisions considering the reactions of their competitors

5. When there is collusion becomes a Cartel

Other examples:Cigarettes, Breakfast cereals,

Chocolate

WHEN DOES IT OCCUR?

Government’s intervention

Main reasons

1. Supply of public goods and services Paved streets, street lighting, security.

2. Correcting externalities Consequences or side effects of an industrial or

commercial activity that affects other parties.

3. Search for a fairer distribution of wealth The most vulnerable groups.

And, where does the government get the money?TAXES!

Principles for establishing taxes

NeutralityEquityEasy to pay and for understandable reasonsSocial benefit

Subsidies

A sum of money granted by the government to assist an industry or business so that the price of a good or service may

remain low or competitive.

Price control Maximun price: The authority establishes it to make a good or

service more accessible to people. Nevertheless, it ties to protect consumers cause distortions in the market (artificially stablished): Scarcity, Black market

Minimum price: Ensures a minimum income to producers. But, generates discrimination because some of them get benefit from others.

GROSS DOMESTIC PRODUCT,GROSS NATIONAL PRODUCT,

DEVELOPMENT AND ECONOMIC GROWTH, INFLATION AND UNEMPLOYMENT

Macroeconomics

Do you remember Macroeconomics?

The part of economics concerned with large-scale or general economic factors.

It is the study of national and global economy.Accounts for aggregate variables such as inflation,

income, product ion and unemployment.Results are the base for economic policy decisions

.Focuses in two basic issues: 1. Economic Growth 2. Fluctuations in economic performance

Gross National Product (GNP)

Gross Domestic Product (GDP)

Is the total value ofgoods and services

produced by the citizens of a country in agiven period.

Is the total value of goods and servicesproduced within a country over a given

period.Four components:

Consumption Government purchases and, Expenditures Net exports

Macro VariablesThe most important ones are:

GDPComponents of the definition

1. Total or market value means: The prices at which each item is traded in markets

instead of the number of production. f.i. 50 apples (production) Each apple costs $10 then, the market value is $5

2. Final goods mean: An item that is bought by its final user during a

specified time period and its different from the intermediate good which is an item that is produced by one firm, bought by another firm and used as a component of a final good or service.

GDPComponents of the definition

f.i. A Ford SUV final good but A Firestone tire on the SUV intermediate good. A Dell computer final good but An Intel Pentium chip inside intermediate good

Note: If we count the value of intermediate goods and services produced to the value of final goods and services, we would count the same thing many times. So, avoid double counting.

Also, some items that people buy are neither final nor intermediate goods.

Second hand goods: used cars or existing homes

GDPComponents of the definition

3. Produced within a country f.i. Toyota, a Japanese firm, produces automobiles in

Mexico and the value of this production is part of the Mexican GDP not part of Japan’s

4. In a given period of time: Normally either a quarter of a year

Important: The GDP also measures the total income of a country and its total expenditure because it shows the direct link between productivity and living standards.

Gross Domestic Product (GDP)

GDP does not include: Nonmarket transactions (illegal), Intermediates to produce other goods Industries outside the country

Formula:

GDP = Consumption + Private investments + Government Expenses + Exports - Imports

Two basic issues: #1 Economic Growth

GDP’s behavior is observed over time to:Determine if there are advances or setbacks in the

country’s activity.

Then, economic growth is defined when we find that real GDP (GDPR) in a year is greater than the previous one.

Also, economic growth means a expansion of the economy’s production possibilities (PPF)

So there:

Economic Growth Rate = current GDPR - past GDPR X 100past GDPR

What is the GDPR?

Supposed this: In 2010 a GDP of $13,000 billion but, a year before In 2009 it was $12,000 billion

We know now that GDP in 2010 was greater…but why? We produced more goods and services We paid higher prices for our goods and services

So, the Real gross domestic product represents the change in production; is the value of final goods and services produced in a given year when valuated at constant prices. Then by comparing the value of g&s at constant prices, we can

measure the change in the quantity of production.

Two basic issues: #1 Economic Growth

So, economic growth measurement is carried out in order to: Make comparisons of

economic welfare Make comparisons

between countries and, Behavioral forecasting

of the economic cycle

Economic Growth vs. Economic Development

It is not the same to refer growth as development because the last one refers to a larger group of variables that have to be taken into consideration.

Among the variables that are ignored in the calculation of growth but not economic development are:

• Health and life expectancy• Educational Level• Environmental quality• Political freedom• Social Justice• Redistribution of income

Short activity: Debate and analyze

Poverty in Mexico

POVERTY & UNEMPLOYMENT

Economic cycle

What is the economyc cycle?

We consider the economic cycle as the set offluctuations (movements) of GDPR over time.We can identify four elements:

1. Contraction: growth slowdown of the GDPR2. Expansion: accelerate the pace of growth of the

RGDP3. Peak (top): highest point reached in the cycle4. Depression (valley): lowest point reached in the

cycle

MO

NEY

How can countries promote growth?

Searching for these elements:

i. Skilled labor and capital

ii. Investment in research and development

iii. Efficient use of resources

Relative Absolute

When we compareliving conditions withinthe country.

When you can notaccess the minimumconditions for survival.

Poverty

Lack of Resourcing

Political instability Culture of

investment/savings

Educational Level

Causes

Spiral of poverty

There are main variables involved in the worsening of living conditions of society.The variables are:NutritionHealthEducation and,Income

Unemployment

It is considered unemployed anyone over 14 who wants to work and can not find a job.

The unemployment rate is calculated using the economically active population (EAP)

Unemployment rate = # of unemployed agents X 100

EAP

Types of Unemployment

1. FRICTIONAL - Resulting from the normal rotation of jobs (daily creation and destruction).

2. STRUCTURAL - Resulting from changes in technology or skills of workers who are forced to retire from their job.

3. CYCLICAL - Resulting from the fluctuation (movement) of the economy (increases during recession, decreases during the expansion).

PRICE INDEX, INFLATION AND EXCHANGE RATES

Prices and currencies

Is the measure of the average of the prices paid by urban consumers for a fixed “basket” of goods and services.

Also,

Is the variable that measures the average level of prices of goods and services purchased by a typical household in the country.The most important one is the Consumer Price Index.

Price index

•Is when there is a constant and widespread increase in prices over a relatively long period of time.•The annual percentage change in the price level.

Some causes of inflation are:1. MONETARY - printing money without backing it up.2. PRODUCTION COSTS - Increase in the price of inputs.3. EXCESSIVE DEMAND - Increase income in the economy but

not enough supply to meet demand

Inflation

Classification of Inflation

When the increase is between 5% and 9% annually. It is manageable with economic policy.

Silent

When the increase presents two digits (10%thereafter). It causes severe disruptions in theeconomy.

Open

Where prices are rising at abreathtaking pace (above 50%). Usually causes chaos in the economy.

Hyper-

inflation

Latent: When the possibility of skyrocketing prices is

always present in a normal growth situation

Consequences of Inflation

Loss of purchasing power•When the same amount of money now is used to purchase fewer goods

Uncertainty•The economic agents can not predict correctly as the economy becomes very volatile

Unemployment•The uncertainty deters investment and this generates unemployment

Exchange Rate

Definition:The price of a foreign currencyin terms of the local currency.

There are some mechanisms to adjust the exchange rate. These are: FLEXIBLE - free

movements in supply and demand

FIXED - established by the government

CONTROLLED - daily glide or changes in a floating band

Types of Exchange Rate

Depreciation - is the falling value of one currency against another. When it happens is a positive outcome for the country's export sector, but not for the importer.

Appreciation - in this case the positive result occurs in the import sector but affects the exporter.

Devaluation - has the same effect that the depreciation but is used to refer to consequences of economic policy in the country.

Interest Rate

It is the extra money you have (or they have) to pay for borrowing (ask)/ lending (give) a specific amount of money.

In other words, the price of money when asked or paid.

The principal benchmark rates are:TIIE and Cetes (Mexico), Libor (UK), Prime(USA)