Basic Econ Section 9-10 for Final PPT PDF

Section 9: Market Structures KRISMAR J R. ASUNCION,MBA Objectives 1.Understand the role of the perfect competitor as a price taker rather than a price maker. 2. Analyze the relationships between efficiency, price, and profit. 3.Understand Pareto Optimality and Efficiency in the context of monop...

Section 9: Market Structures KRISMAR J R. ASUNCION,MBA Objectives 1.Understand the role of the perfect competitor as a price taker rather than a price maker. 2. Analyze the relationships between efficiency, price, and profit. 3.Understand Pareto Optimality and Efficiency in the context of monopolistic competition, monopoly, and oligopoly. 4.Understand the importance of non-price competition under oligopoly. 5.Understand the characteristics and implications of monopolies. 6.Understand and analyze market structures and their important developments, as well as their impact on innovation. MARKET STRUCTURES Market structure refers to how different industries are classified and differentiated based on their degree and nature of competition for services and goods. The four popular types of market structures include 1.perfect competition, 2.oligopoly market 3.monopoly market 4.monopolistic competition. The four popular types of market structures The four popular types of market structures What Is Market Efficiency? Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available. Pareto Optimality and Efficiency  implies that resources are allocated in the most economically efficient manner, but does not imply equality or fairness. An economy is said to be in a Pareto optimum state when no economic changes can make one individual better off without making at least one other individual worse off. What do you mean by monopolistic competition? when many companies offer products that are similar but not identical. Example: Grocery stores: Grocery stores exist within a monopolistic market as there are a large number of firms that sell many of the same goods but with distinct branding and marketing.  Monopoly A monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector. Monopolies are discouraged in free-market economies because they stifle competition, limit consumer substitutes, and thus, limit consumer choice.  Possible Break – Down of Cartels A cartel is an organization created from a formal agreement between a group of producers of a good or service to control supply or to regulate or manipulate prices. A collection of independent businesses or countries that act together like a single producer, cartel members may agree on prices, total industry output, market shares, allocation of customers, allocation of territories, bid-rigging, and the division of profits. Example: In the oil and gas industry, the Organization of the Petroleum Exporting Countries (OPEC) is often used as an example of a cartel. Although there is debate around whether the economic evidence demonstrates it is a true cartel, OPEC's member countries do exert market influence. Market Structure and Innovation The effect of market structure on innovation depends on the dual forces of incentive and opportunity. 1. By incentive, because a firm in a particular market structure has an incentive to innovate. Example: Incentives can take the form of discounts, loyalty points, rewards, bonuses, recognition, or other forms of compensation. 2. By opportunity, because a firm in a particular market structure has an opportunity to engage in innovation. Example : include entering a growing niche market, expanding into untapped geographic regions, introducing innovative products or services, or targeting an underserved customer segment. why Important Developments of Market Structures The important developments in market structures are significant because they influence economic behavior, business strategies, and government policies. Understanding these developments helps to analyze how markets operate and adapt to changes over time. key reasons why they are important. 1. Influence on Business Strategies 2. Impact on Consumers 3. Economic Efficiency 4. Role in Public Policy 5. Adaptation to Technological Changes 6. Globalization and Market Integration 7. Academic and Practical Insights 1. Influence on Business Strategies 1. perfect competition, firms focus on efficiency due to low profit margins. 2. Imonopolistic competition, firms invest in product differentiation. 3. Imonopolies, firms may focus on maintaining market dominance. 4. Ioligopolies, strategic planning around competitors’ actions is crucial. 2. Impact on Consumers Market structures affect: 1. Product availability: Competitive markets increase options, while monopolies may limit choices. 2. Pricing: Prices tend to be lower in competitive markets and higher in monopolistic ones. 3. Quality: Firms in competitive markets often prioritize quality and innovation to attract customers. 3. Economic Efficiency Different market structures affect resource allocation and productivity: 1. Perfect competition leads to optimal allocation and efficiency. 2. Monopolies can create inefficiencies like deadweight loss unless regulated. 4. Role in Public Policy Understanding market structures guides government interventions such as: 1. Antitrust laws: Preventing monopolistic practices and promoting competition. 2. Regulations: Ensuring fair pricing and preventing exploitation. 3. Subsidies: Supporting industries in competitive markets. 5. Adaptation to Technological Changes Market structures evolve with technological advancements: 1. The rise of e-commerce has shifted industries from monopolistic to more competitive. 2. Automation and AI influence entry barriers, market dominance, and firm strategies. 6. Globalization and Market Integration Developments in market structures explain how global trade reshapes competition: 1. Domestic markets may move toward oligopolistic or monopolistic patterns due to international players. 2. Firms adjust strategies to compete in larger, more integrated markets. 7.Academic and Practical Insights Economists and business leaders use insights into market structures to predict outcomes, design policies, and create sustainable business models. Section 10:Market Failures and Government Intervention Objectives At the end of the final period, the students should be able to; 1. Understand market failures, types of market failures, and information failures such as imperfect and asymmetric information. 2. Analyze externalities, understand costs and benefits, and evaluate the effects of negative externalities. 3. Understand costs and benefits, the effect of negative externalities, and deadweight loss. 4. Understand public goods, non-excludable and non-rival public goods, and encourage positive externalities. How Does Market Failure Happen? Market failure occurs when the allocation of goods and services by a free market is not efficient. This inefficiency means that the market fails to maximize societal welfare. key reasons why market failures happen: 1. Externalities 2. Public Goods 3. Information Asymmetry 4. Market Power 5. Factor Immobility 6. Inequality 7. Lack of Innovation key reasons why market failures happen: 1. Externalities Definition: Costs or benefits of a transaction that affect third parties who are not directly involved in it. How It Happens: Negative Externalities When a producer or consumer imposes a cost on others (e.g., pollution from a factory affecting nearby residents). Positive Externalities When a producer or consumer provides a benefit to others (e.g., an individual getting vaccinated benefits public health). Result: The market fails to account for these external costs or benefits, leading to overproduction (in case of negative externalities) or underproduction (in case of positive externalities). key reasons why market failures happen: 2. Public Goods Definition: Goods that are non-excludable (cannot prevent non-payers from using them) and non-rivalrous (one person's use does not reduce availability for others). How It Happens: Markets struggle to provide these goods because producers cannot easily charge consumers. Examples: National defense, street lighting. Result: Free-rider problem leads to underprovision of these goods. key reasons why market failures happen: 3. Information Asymmetry Definition: A situation where one party in a transaction has more or better information than the other. How It Happens: Adverse Selection: Buyers or sellers make decisions based on incomplete information (e.g., buying a used car without knowing its defects). Moral Hazard: After a transaction, one party takes risks knowing the other party bears the cost (e.g., insured individuals taking fewer safety precautions). Result: Inefficient transactions or market collapse. key reasons why market failures happen: 4. Market Power Definition: The ability of a firm or a group to control prices or exclude competition. How It Happens: Monopolies: Single firms dominate the market, restricting output and increasing prices. Oligopolies: Few firms collude to set prices and limit competition. Result: Resources are allocated inefficiently, often benefiting the firm at the expense of consumers. key reasons why market failures happen: 5. Factor Immobility Definition: When resources such as labor or capital cannot move freely to where they are needed most. How It Happens: Geographical barriers (e.g., workers unable to relocate to job-rich areas). Skill mismatches (e.g., workers lacking skills for available jobs). Result: Unemployment or underemployment and inefficient resource allocation. key reasons why market failures happen: 6. Inequality Definition: Disproportionate distribution of wealth and resources. How It Happens: Unchecked market mechanisms can lead to widening wealth gaps. Access to opportunities may be skewed by initial disparities. Result: Reduced overall societal welfare and potential social unrest. key reasons why market failures happen: 7. Lack of Innovation Definition: Markets may fail to incentivize research and development. How It Happens: High costs and risks deter private investment. Free-rider problem in knowledge sharing. Result: Slower technological progress and lower productivity. Information Failure: Imperfect and Asymmetric Information Information failure occurs when participants in a market lack sufficient, accurate, or timely information to make well-informed decisions. The two main types of information failure: Imperfect Information Asymmetric Information. Information Failure: Imperfect and Asymmetric Information 1. Imperfect Information Definition: A situation where all parties in a market do not have access to complete or accurate information about the goods or services being traded. Examples of Imperfect Information: Consumers are unaware of the long-term health effects of certain products (e.g., unhealthy fast food or smoking). Producers underestimate demand due to poor market research. Buyers and sellers lack up-to-date information on prices Result: Suboptimal Decisions: Consumers may overpay or underpay for goods, or purchase low-quality products. Underconsumption or Overconsumption: Essential goods (e.g., education, healthcare) may be underused due to lack of awareness, while harmful goods may be overused. Information Failure: Imperfect and Asymmetric Information 2. Asymmetric Information Definition: A specific type of imperfect information where one party in a transaction has more or better information than the other. Examples: Used Car Market: Sellers know more about the condition of the car than buyers, leading to the "lemons problem," where only poor-quality cars remain in the market. Healthcare: Doctors may recommend unnecessary treatments because patients lack the knowledge to evaluate alternatives. Real Estate: Sellers might withhold information about defects in a house. Key Types of Asymmetric Information: 1. Adverse Selection -Occurs when one party takes advantage of having better information before a transaction. Example: In health insurance, individuals with higher health risks are more likely to purchase insurance, leading to higher costs for insurers. 2.Moral Hazard Information Failure: Imperfect and Asymmetric Information 2Moral Hazard: Happens when one party changes their behavior after a transaction because they do not bear the full consequences of their actions. Example: A person with car insurance may drive recklessly, knowing they are financially protected against accidents. Addressing Information Failures Governments and markets employ several strategies to reduce information failures: 1.Transparency Requirements: Mandatory disclosure of product information (e.g., nutritional labels, ingredient lists). 2.Regulation: Laws against false advertising or misleading claims. 3.Screening Mechanisms: Buyers collect information about sellers (e.g., inspections for used cars). 4.Signaling: Sellers send credible signals to buyers (e.g., warranties, certifications). 5.Public Awareness Campaigns: Educating consumers about potential risks and benefits. Costs and Benefits of Addressing Information Failure Addressing information failure involves weighing the costs and benefits of intervention strategies to improve market outcomes. Costs of Addressing Information Failure: 1. Implementation Costs: 2. Administrative Burden: 3. Market Distortions: 4. Increased Prices: 5. Risk of Government Failure: 6. Limited Effectiveness: Costs and Benefits of Addressing Information Failure Costs of Addressing Information Failure 1. Implementation Costs: Designing and enforcing regulations (e.g., labeling laws, consumer protections) can be expensive for governments. Example: Monitoring compliance with food labeling standards. Costs of Addressing Information Failure 2.Administrative Burden: Establishing regulatory agencies or mechanisms to oversee information quality can increase bureaucracy. 3 Market Distortions: Over-regulation may discourage market entry or innovation. For example, high compliance costs could reduce competition in industries like pharmaceuticals. 4.Increased Prices: The cost of compliance with transparency measures (e.g., mandatory product testing or labeling) may be passed on to consumers, leading to higher prices. Costs of Addressing Information Failure 5.Risk of Government Failure: Poorly designed policies could worsen inefficiencies or fail to address the problem effectively. Example: Overly complex labeling can confuse consumers instead of clarifying product details. 6.Limited Effectiveness: Even with regulations, some consumers may lack the ability to interpret or use the information provided effectively. Benefits of Addressing Information Failure 1. Improved Decision-Making: 2. Increased Market Efficiency: 3. Enhanced Consumer Trust: 4. Reduced Negative Externalities: 5. Equity and Fairness: 6. Encouragement of Competition and Innovation: Benefits of Addressing Information Failure 1. Improved Decision-Making:Consumers and producers make better choices when they have access to accurate, complete, and timely information. Example: Nutritional labeling helps consumers choose healthier food options. 2. Increased Market Efficiency:Reducing information asymmetry can prevent adverse selection and moral hazard, improving overall resource allocation. Example: Transparent pricing in financial markets enhances trust and participation. 3. Enhanced Consumer Trust:Clear regulations and disclosure policies foster confidence in market transactions. Example: Certification programs (e.g., organic or fair-trade labels) build consumer loyalty. Benefits of Addressing Information Failure 4.Reduced Negative Externalities:Accurate information can discourage consumption of harmful products. Example: Cigarette warning labels reduce smoking rates, benefiting public health. 5.Equity and Fairness: Better-informed consumers, particularly those in vulnerable groups, are less likely to be exploited. Example: Laws requiring full disclosure of loan terms protect borrowers from predatory lending. 6. Encouragement of Competition and Innovation:Clear rules create a level playing field, incentivizing firms to innovate and differentiate products through quality rather than exploiting information gaps. Section 11:Organization of Firms At the end of the final period, the students should be able to; 1. Understand market sector organization and the various forms of business enterprises. 2. Define the role and functioning of cooperatives. Section 11:Organization of Firms The organization of firms in microeconomics focuses on how firms structure themselves to produce goods and services efficiently, manage costs, and maximize profits. This involves analyzing production processes, decision-making structures, and the relationships between inputs and outputs. 1. Organization of Firms Key Concepts in the Organization of Firms 1.Objectives of Firms: 1.Profit Maximization: Primary goal of most firms. 2.Sales Maximization: Aiming to increase revenue, sometimes at the expense of profits. 3.Satisficing: Meeting acceptable performance rather than maximizing outcomes. Section 11:Organization of Firms Key Concepts in the Organization of Firms 2.Types of Firms: Sole Proprietorship: Owned and managed by a single individual. Partnership: Owned by two or more individuals sharing profits and risks. Corporation: A separate legal entity owned by shareholders, offering limited liability. Cooperatives: Owned and operated for the benefit of its members. Key Concepts in the Organization of Firms 3.Production Decisions: 1. Short Run: Fixed and variable inputs (e.g., labor can change, but capital is fixed). 2. Long Run: All inputs are variable, allowing firms to adjust their scale of operations. 4.Costs of Production: 3. Fixed Costs (FC): Do not vary with output (e.g., rent). 4. Variable Costs (VC): Change with output (e.g., raw materials). 5. Total Costs (TC): Sum of fixed and variable costs. 6. Marginal Cost (MC): Additional cost of producing one more unit. 7. Average Costs (AC): Cost per unit of output. Key Concepts in the Organization of Firms 5.Revenue Analysis: 1.Total Revenue (TR): Price × Quantity. 2.Average Revenue (AR): TR ÷ Quantity. 3.Marginal Revenue (MR): Additional revenue from selling one more unit. 6.Market Structures: 4.Perfect Competition: Many firms, homogeneous products, no barriers to entry. 5.Monopoly: Single firm dominates the market. 6.Oligopoly: Few firms dominate, often with product differentiation. 7.Monopolistic Competition: Many firms, product differentiation, some market power. Key Concepts in the Organization of Firms 7.Firms and Efficiency: Allocative Efficiency: Producing goods and services that consumers most value. Productive Efficiency: Producing at the lowest possible cost. Dynamic Efficiency: Innovations and improvements over time. 2.Organizational Structures of Firms 1.Hierarchical Structure: Traditional pyramid with clear lines of authority. 2.Flat Structure: Few levels of management, encouraging collaboration. 3.Matrix Structure: Combines functional and divisional structures, often for projects. 4.Network Structure: Decentralized structure where core activities are outsourced. 3.Decision-Making in Firms Centralized Decision-Making: Top management makes all key decisions. Decentralized Decision-Making: Decision-making authority is distributed across levels. 4. Firm Behavior in the Market 1.Profit Maximization Rule: Firms produce where Marginal Revenue (MR) = Marginal Cost (MC). 2.Shutdown Decision: If price falls below the average variable cost (AVC) in the short run, the firm may shut down. Cooperatives in Microeconomics Cooperatives are a type of firm where the business is owned and operated for the mutual benefit of its members, who share in the profits and decision-making. Key Characteristics of Cooperatives 1.Member Ownership: 1.Owned and controlled by members, typically individuals or small businesses. 2.Each member often has one vote, emphasizing democratic governance. 2.Shared Benefits: 1.Profits (or surpluses) are distributed among members in proportion to their participation, not based on capital investment. 3.Common Goals: 1.Cooperatives prioritize the collective welfare of members, which can include economic, social, or environmental goals. Key Characteristics of Cooperatives 4.Voluntary and Open Membership: 1. Open to all individuals willing to accept the responsibilities of membership. 2.Autonomy and Independence: 1.While cooperatives may partner with other organizations, they remain autonomous entities. Types of Cooperatives 1. Consumer Cooperatives 2. Producer Cooperatives: 3. Worker Cooperatives: 4. Housing Cooperatives: 5. Financial Cooperatives: Types of Cooperatives 1.Consumer Cooperatives: 1.Owned by consumers who use the cooperative’s goods or services. 2.Example: Food co-ops where members purchase goods at lower prices. 2.Producer Cooperatives: 1.Owned by producers who use the cooperative to process, market, or sell their products. 2.Example: Agricultural cooperatives that help farmers sell crops collectively. 3.Worker Cooperatives: 1.Owned and self-managed by employees. Types of Cooperatives 4.Housing Cooperatives: 1.Owned by residents who share ownership of a building or housing complex. 2.Example: Co-op housing in urban areas 5.Financial Cooperatives: 3.Credit unions or cooperative banks owned by their members, providing financial services. 4.Example: A local credit union offering loans and savings accounts. Role of Cooperatives in Microeconomics 1. Market Efficiency: 2. Income Redistribution: 3. Consumer Welfare: 4. Local Economic Development: 5. Risk Sharing: Role of Cooperatives in Microeconomics 1.Market Efficiency: 1. Cooperatives address market failures by pooling resources and reducing transaction costs. 2. Example: Farmers banding together to access larger markets. 2.Income Redistribution: 1. Surplus profits are distributed among members, reducing income inequality. 3.Consumer Welfare: 1. Consumer cooperatives ensure fair prices and access to essential goods. 2. Example: Affordable groceries in rural food deserts. 4.Local Economic Development: 1. Cooperatives reinvest in local communities, creating jobs and supporting local economies. 5.Risk Sharing: Members share risks, reducing individual financial burdens. Challenges of Cooperatives 1.Capital Acquisition: 1.Difficulty raising capital since members may have limited financial contributions. 2.Decision-Making: 1.Democratic processes can slow decision-making, especially in large cooperatives. 3.Free-Rider Problem: 1.Members may benefit without actively contributing. 4.Competition: 1.Competing with profit-driven firms can be challenging due to smaller economies of scale.