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ECN 001A Lecture Notes - Lecture 5: Market Power, Atkins Diet, Cream Cheese

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School
UC-Davis
Department
Economics
Course
ECN 001A
Professor
P.Lombardi

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ECN 001A Full Course Notes
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ECN 001A Full Course Notes
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Document Summary

Ch 4 - the market forces of supply and demand. Market: a group of buyers and sellers of a particular product. Competitive market is one w/many buyers and sellers (each has a negligible effect on price) Price taker: there is a numerous amount of buyers and sellers so no one can affect market price. Ex. individuals vs. starbucks; individuals (price taker) can"t change the price that the company has set. Vs. big companies (walmart) can dictate the price bc they buy so much (in this chapter, we assume that markets are perfectly competitive) These equilibrium prices are the signals that guide economic decisions ann thereby allocate scarce resources. Quantity demanded (qd) of any good: the amount of the good that buyers are willing and able to purchase. You have to want the good, but you also have to be able to buy the good to be considered a participant in the qd.

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Related Questions

1. Characteristics of competitive markets

The model of competitive markets relies on these three core assumptions:

1. There must be many buyers and sellers a few players can't dominate the market.
2. Firms must produce identical products buyers must regard all sellers' products as equivalent.
3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

Scenario

Competitive?
The government has granted the U.S. Postal Service the exclusive right to deliver mail. ________________
Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices.  
Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one. _________________
There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to

"Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar."

How could we argue that these markets are not competitive?

Select one:

a. Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.

b. The individual grocery stores or gas stations do not have the power to control price on many items that they sell, so they are not able to compete on price.

c. They usually purchase products from the same distributor: i.e., all grocery stores and gas stations buy their Coke products from the same Coke distributor. Thus, individual grocery stores do not really compete with each other; same for individual gas stations.

d. Each grocery store or gas station is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.

Could each firm face a demand curve that is not perfectly elastic?

Select one:

a. No; since customers aren't willing to spend their morning visiting each grocery store or gas station in a large city to find the best deal, then each firm's demand curve will be perfectly elastic since consumers do not have full information.

b. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.

c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.

d. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.

How profitable do you expect grocery stores and gasoline stations to be in the long run?

Select one:

a. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.

b. Because of rising prices of both food and gasoline, each of these industries is expected to suffer long-run losses for the foreseeable future.

c. Grocery stores would be expected to enjoy long-run positive profits since they sell a wider variety of products; gasoline stations would be expected to break even or take losses in the long run because of their more limited range of products.

d. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.

Can you explain to me the reasoning behind the answers?

"Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar."

How could we argue that these markets are not competitive?

Select one:

a. Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.

b. The individual grocery stores or gas stations do not have the power to control price on many items that they sell, so they are not able to compete on price.

c. They usually purchase products from the same distributor: i.e., all grocery stores and gas stations buy their Coke products from the same Coke distributor. Thus, individual grocery stores do not really compete with each other; same for individual gas stations.

d. Each grocery store or gas station is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.

Could each firm face a demand curve that is not perfectly elastic?

Select one:

a. No; since customers aren't willing to spend their morning visiting each grocery store or gas station in a large city to find the best deal, then each firm's demand curve will be perfectly elastic since consumers do not have full information.

b. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.

c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.

d. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.

How profitable do you expect grocery stores and gasoline stations to be in the long run?

Select one:

a. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.

b. Because of rising prices of both food and gasoline, each of these industries is expected to suffer long-run losses for the foreseeable future.

c. Grocery stores would be expected to enjoy long-run positive profits since they sell a wider variety of products; gasoline stations would be expected to break even or take losses in the long run because of their more limited range of products.

d. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.