Health Sciences 3840B Lecture 3: Lec 3 Competitive Markets
30 May 2018
School
Department
Course
Professor
Producers attempt to maximise profit –can’t control anything, but take the info and do what is best for themselves
Competitive environment –all individuals are trying to maximize utility and producers maximize profit –trying to do what is best for themselves
Leads to a certain distribution of resources
Under some conditions that distribution will be Pareto efficient
May not maximize welfare
Won’t be equitable
Assume people have transitive and complete preferences, that they have this utility function
If you’re in equilibrium nobody has any incentive to change what they’re doing
Producers and consumers are doing their thing and nobody wants anything to change
If your purchasing decisions are going to make producers change products and price, which will in turn affect you again, then the system is changing
Competition: If there are a bunch of producers, decision that one producer makes don’t matter because there are so many other producers
Producers are so small relative to the market that they can’t make a difference
If a competitive market can lead to allocative efficiency and pareto efficiency, you don’t need to collect everybody’s prefer ences yourself, the free market can do it
itself
-don’t need policy or regulation
Individuals –we have a model of their utility and they’ll try to maximize it given their budget constraint
Same with producers
Our prediction is that producers are going to produce the quantity that maximizes their profit
Price = Marginal cost
Why? What would happen if that wasn’t the case?
If price was greater than marginal cost, you’ll want to increase production because the more you produce the more you profit
If 1.50 is the market price, you’ll produce 40 coffees
Producing more is not worth it
If you produce 20 you’ll get 1.50 per coffee, you can’t change the market price
-But if you produce 30 you’ll get more for the price, you’ll want to move up the line to the market price
Upward-sloping –depends on assumptions we’re making about technology to produce stuff
Capital fixed: e.g. coffee shop exercise, you can’t scale up production you can only work quicker
Demand curve is downward sloping –law of demand. Not very strong assumptions
Cf. Supply is upward sloping but it depends on technology
Vertical portion to the demand curve –when there’s a certain amount of price increase everybody is still going to buy it (0.50 vs. $1)
Important in health care –if people need something, if you change the price they might not adjust their demand
i.e. if you need coffee to live they’ll buy it no matter what the price
Assume no bargaining, taking prices as given
If consumers are taking the price as given,
Equilibrium quantity is 60 and equilibrium price is $2
Producers won’t lower prices below their marginal cost – they won’t survive in the market unless they have the technology to produce at the same rate and cost as
the other producers
They could communicate with each other and end the price war
If they could work together then there wouldn’t be a competitive environment anymore
Keep prices artificially high for consumers
If McDonalds and Burger King worked together to pretend that they were competing
When we’re talking about a competitive market we’re assuming that price-fixing schemes are not happening
Competitive equilibrium is a way of allocating resources that is cost-effective efficient
Also if something is cost-effective efficient it is also technically efficient
Competitive market does not satisfy welfare but it is Pareto efficient
In an environment where everybody is doing what is best for them, you make them better off by giving them more money
But this money has to come from somebody else, who will become worse off
Take money from a rich person and give it to a poor person, but the person you took the money from is still worse off than be fore
Even if one person has all the wealth, as long as they value it you can’t make everybody else better off without making that one person worse off
Lec 3 Competitive Markets
May 6, 2018
3:30 PM
Health Economics Page 1
Document Summary
Producers attempt to maximise profit can"t control anything, but take the info and do what is best for themselves. Competitive environment all individuals are trying to maximize utility and producers maximize profit trying to do what is best for themselves. Under some conditions that distribution will be pareto efficient. Assume people have transitive and complete preferences, that they have this utility function. If you"re i(cid:374) e(cid:395)uili(cid:271)riu(cid:373) (cid:374)o(cid:271)ody has a(cid:374)y i(cid:374)(cid:272)e(cid:374)ti(cid:448)e to (cid:272)ha(cid:374)ge (cid:449)hat they"re doi(cid:374)g. Producers and consumers are doing their thing and nobody wants anything to change. If your purchasing decisions are going to make producers change products and price, which will in turn affect you again, then the system is changing. Co(cid:373)petitio(cid:374): if there are a (cid:271)u(cid:374)(cid:272)h of produ(cid:272)ers, de(cid:272)isio(cid:374) that o(cid:374)e produ(cid:272)er (cid:373)akes do(cid:374)"t (cid:373)atter (cid:271)e(cid:272)ause there are so (cid:373)a(cid:374)y other producers. Produ(cid:272)ers are so s(cid:373)all relati(cid:448)e to the (cid:373)arket that they (cid:272)a(cid:374)"t (cid:373)ake a differe(cid:374)(cid:272)e.
