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DEMAND AND SUPPLY. DEMAND AND SUPPLY. Recap In unit 1 , we studied how the free market allocate scares resources. In unit 2 we will study how scares resources are allocated in different kinds of “free” markets. These markets broadly exist in 4 forms: Perfection Competition Monopoly

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slide2

DEMAND AND SUPPLY

Recap

In unit 1, we studied how the free market allocate scares resources.

In unit 2 we will study how scares resources are allocated in different kinds of “free” markets. These markets broadly exist in 4 forms:

  • Perfection Competition
  • Monopoly
  • Oligopoly
  • Monopolistic Competitive
slide3

DEMAND AND SUPPLY

PERFECT COMPETITION

“IN THE END, WE ARE ALL GOING TO LOSE”

The RotiPrata Man

slide4

DEMAND AND SUPPLY

The Market for Roti Prata – Perfect Competition

Cost of 1 prata is $0.50 (Using best available resource , technology and method)

$2.00/prata ($1.50 profit)

$1.50/ prata ($1.00 profit)

Profile of The Quintessential Consumer

$1.50/ prata ($1.00 profit)

$1.50/ prata ($1.00 profit)

I want it cheap

I can get my prata ANYWHERE

MAKE ME PRATA HAPPY!!!

slide5

DEMAND AND SUPPLY

The Market for Roti Prata – Perfect Competition

Cost of 1 prata is $0.50 (Using best available resource , technology and method)

$1.50/ prata ($1.00 profit)

$2.00/prata ($1.50 profit)

$1.00/prata ($0.50 profit)

$1.00/prata ($0.50 profit)

$1.50/ prata ($1.00 profit)

$1.00/prata ($0.50 profit)

$1.00/prata ($0.50 profit)

$1.50/ prata ($1.00 profit)

$1.00/prata ($0.50 profit)

$1.00/prata ($0.50 profit)

I want it cheap

So many prata stores

MAKE ME PRATA HAPPY!!!

slide6

DEMAND AND SUPPLY

The Market for Roti Prata – Perfect Competition

Cost of 1 prata is $0.50 (Using best available resource , technology and method)

$0.50/prata (no more economic profit) at P= MC

$0.50/prata (no more economic profit) at P= MC

$1.00/prata ($0.50 profit)

$1.00/prata ($0.50 profit)

$0.50/prata (no more economic profit) at P= MC

$1.00/prata ($0.50 profit)

$0.50/prata (no more economic profit) at P= MC

$1.00/prata ($0.50 profit)

$0.50/prata (no more economic profit) at P= MC

$1.00/prata ($0.50 profit)

$0.50/prata (no more economic profit) at P= MC

$1.00/prata ($0.50 profit)

I want it cheap

So many prata stores

MAKE ME PRATA HAPPY!!!

$0.50/prata (no more economic profit) at P= MC

slide7

DEMAND AND SUPPLY

Perfect Competition

In a market that is under perfect competition, in the long run there is no more economic profits (only normal profits) to be made.

NO MORE

NO MORE

NO MORE

slide8

DEMAND AND SUPPLY

Accounting Profits = (Revenue – Cost of FOP)

BUT

Economic Profits = (Revenue – Cost of FOP) - Opportunity cost

Economic Profit is Sales Revenue minus all costs including the opportunity cost. Thus economic profit may be lower than the accounting profit. If accounting profit equals the opportunity cost, economic profit is zero.

When Economic Profits = 0 we call this normal profit.

Normal profit is the minimum level of profit needed for a company to remain competitive in the market.

slide9

DEMAND AND SUPPLY

Examples of Perfect Competition

(refer to examples on page 29 Tragakes IB Text Book)

1.The International Inter Bank Forex (Currency) Market

  • Interbank Bid/Offer Spread is 0.03 cents for every US$1 traded. ie. For every simultaneous buy/sell transaction, the bank will only be able to make US$0.03 for every US$1 traded. If there were less buyer/seller, the spread would be wider.
  • Gold prices very volatile and nobody controls it.
slide10

DEMAND AND SUPPLY

Perfect Competition

1. All firms sell an identical product. 2. All firms are price-takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit.

slide11

DEMAND AND SUPPLY

The Monopoly Market

“I have control and there is not much you can do!”

Microsoft Operating System

slide12

DEMAND AND SUPPLY

The Monopoly Market

Q1. What is it ab0ut Microsoft Vista that you not like?

Q2. What are some of the options that you have to help you address your dissatisfaction with Vista.

In your investment groups, brainstorm for some of the features of microsoft vista that you do not like.

slide13

DEMAND AND SUPPLY

The Monopoly Market

The microsoft license

for usage of the

Microsoft Vista software.

Q1. How many computers can you load Microsoft Vista into with one original copy in your hands?

Ans: 2

Q2. How many times can you reinstall microsoft Vista into your computer?

Ans: 2

Q3. Why would anyone buy a software with a license that only allows you to install on 2 computer or reinstall only 2 times?

Ans: Because we don’t have a choice!

slide14

MONOPOLY

of the operating system market

Consumer’s Disadvantages

1. Trouble 1 – Microsoft has 92.12% of the operating system software market with small and weak competitors.

The size of Microsoft is huge!

Homogenous

Product

2. Trouble 2 – The product (operating system software) does not have substitutes.

1 firm with virtually no other firms in sight

3. Trouble 3 – Most competitors to MS’s O/S market are small and insignificant.

4. Trouble 4 – Developing a new software to compete with Microsoft Windows is very expensive and takes a long time to test for workability.

Large ($$) barriers to entry

slide15

DEMAND AND SUPPLY

OLIGOPOLY

“Why kill each other by cutting prices, let’s just collaborate and make the consumer pay more instead!!”

Organization of Petroluem Exporting Countries

(OPEC)

The OPEC Cartel

slide16

DEMAND AND SUPPLY

OLIGOPOLY

Have you ever observed that gas prices at the pump does not seem to fall even when the international oil prices have dropped significantly?

% change of average fuel oil price at gas stations in Singapore from Jan 2008 to Dec 2009 29%

% Change in international oil price from Jan 2008 to Dec 2009 is 72%

slide17

DEMAND AND SUPPLY

Monopolistic Competitive

The Car Market

The Watch Market

Q1. For each market, describe the kind (profile) of customer that would buy each brand.

Q2. Are these markets, perfectly competitive “free markets”. For these companies, in the end, is profits = 0?

The Shoe Market