Economics Chapter 6 Notes PDF

6.1- Monopoly & Monopolistic Competiton By: Christian Monopolist Demand (1 Seller) -​ The demand curve is the same as for the entire market -​ It is downward sloping -​ Demand curve is INELASTIC What about monopolistic competition? Monopolistic Com...

6.1- Monopoly & Monopolistic Competiton By: Christian Monopolist Demand (1 Seller) -​ The demand curve is the same as for the entire market -​ It is downward sloping -​ Demand curve is INELASTIC What about monopolistic competition? Monopolistic Competitor's Demand: -​ MAIN DIFFERENCE: Monopolistic demand curve is flatter because there is substitutes (compared to monopolist, it would be more steeper for monopoly bc no substitutes) -​ Demand Curve is ELASTIC (bc of substitutes) To graphs… 1.​ FInd where MR meets MC and put a point 2.​ FInd quantity based on straight vertical line you draw the Demand curve 3.​ Draw horizontal line toward y axis on the left 4.​ Finish the line for AC 5.​ Now you’ve created Profit box and revenue box so you can either calculate profit by find out area of the top rectangle or you can do P=TR-TC (you can be asked to do either on test so know how to do it) Now moving onto oligopolist's demand… We left this last because this is the weirdest demand curve because of the type of industry it is (relationships between the competitors) -​ Because there are few sellers, what one seller does requires the attention of other competitors (they have to keep in mind what they are doing) -​ They are competing for market share -​ This is called MUTUAL INTERDEPENDENCE (their attention is on you and your attention is on them) Oligopolist’s Demand: -​ Oligopolies are characterized by mutual interdependence -​ (E.g, 2 firms competing against each other and one raises the price, he will most likely lose a lot of customers) - The demand is ELASTIC -​ (E.g if 2 firms are competing and one lowers the price, it forces the other firm to lower the price to match that. Also you will attract more customers to both firms because the price is lower and the law of demand, but since both firms lowered the price, both firms will get practically the same amount) - The demand is INELASTIC -​ The demand will be VERY ELASTIC -​ Because of both of these things, the price ends up being the same -​ Oligopolies in a market made up of rivalry like this causes a kinked demand curve (INSERT GRAPH) But there are ways that the oligopolies can cooperate with each other.. Cooperative Oligopolies: -​ Price leadership (company B just copies what company A does and looks like them as a leader so for example company B raises the price and company A just copies what they do to raise the price) -​ This is illegal but collusion (price fixing) is another way of cooperative oligopolies (discussing terms to both raise the price) -​ (E.g was the bread price fixing that happened between walmart, loblaws, metro kept raising the price of bread simultaneously) -​ Next is cartel they limit the supply to keep the price high(E.g- OPEC) 6.2: Oligopolistic Competition Revenue Condition For Oligopolist -​ Business marginal revenue curve has 2 linear parts -​ They are BELOW kinked curve What about profit maximization for an Oligopoly? -​ Just like any market, the quantity is found where marginal revenue = marginal cost -​ PRICE is found using the business kinked demand curve For a graph… 1.​ From the kink, draw a dotted line all the way down 2.​ The MR curve is under the revenue curve and connect 3.​ Then throw in marginal cost curve (checkmark) and AC 4.​ Find the point of profit maximization where MR = MC 5.​ FInd AC by drawing a dotted line toward y axis on left side 6.​ Find AR where it is where the top kink is 7.​ You can find profit by finding out area of rectangle or 8.​ Finding out TR and TC then minus The process is basically the same for all markets! Now moving onto game theory… Game Theory -​ There is a study on interdependent players achieve their goals (There is a whole study behind how oligopolists act based on being interdependent which is from the last chapter) -​ E.g - Its like chess, you always think about what your competitor is trying to do and you try to think ahead -​ Well there's a whole field for this and it's called game theory Now moving onto The prisoner’s dilemma… Prisoner’s Dilemma -​ This concept means that with each player carrying about their own self interest, they don’t usually pick the best choice -​ E.g- 2 arrested men are facing the choice to confess or not to confess. We are in separate cells and There's 4 possible outcomes for this. The best outcome is that if both of you dont confess you both get 1 year. But its hard to trust that because if Sharushon confesses  then Christian will go away for 20 years and vice versa. Because of both these dilemmas, the best option you think for you and the safe option is confessing and since both of them confess, they both get 5 years. Now the option where one confesses and one doesn't will never happen based on the nature of this because it’s the worst one. In conclusion, you pick the least optimal option looking out for your own interests when in reality, there was a better option. Now let's apply the prisoner's dilemma to oligopoly…. -​ E.g- 2 companies get together and want to conduct price fixing. If both businesses stick with the agreement they make 20M in profit, if one cheats and one doesn't, then 1 will make 25 million and one makes 10 million. Now not cheating means they both raise the prices simultaneously. If Bell cheats and Rogers doesn't, then Bell makes 25 M and Rogers makes 10M. Now the other option is that Roger cheats and makes 25M and Bell makes 10M. If they both cheat, they both make 15M. Now the best possible option is that they don’t cheat and if they can trust each other and make 20M. Now that's the ideal outcome, But since each company is going to look out for their best interests, they both know that if they cheat then they can potentially make 25M. The ideal is to pick the “dont cheat option” but the self-defeating outcome is that they will both end up cheating and make 15M. So it's self-defeating because at the expense of looking out for their own interests, they don’t make the best decision. Keep in mind the options with one person only cheating and the other not cheating WILL NEVER HAPPEN. They can’t trust each other. Keep in mind that this isn’t legal so they are going based on handshakes here and so they pick the self defeating option, considering the consequences. Moving onto anti-combines Legislation…. Anti-Combines Legislation -​ These are basically laws aifghm,.med at preventing industrial concentration -​ In this, you don't have to prove that they are bluntly guilty, you have to prove that he probably did it  -​ E.g - OJ Simpson was proved NOT GUILTY in the criminal sense for his criminal offense but for the civil part where they had to prove that he probably did it (which is easy to prove), he was proven guilty Now some of the criminal and Civil offenses under Competition Acts are.. -​ Conspiracy -​ Bid-Rigging (companies talking to each other and bidding with each other and deciding who wisn what type of projects) -​ Predatory Pricing (lowering their price below their cost of production to bankrupt a competitor. It is illegal in the oligopolistic market.) -​ Abuse of Dominant Position (using your size in one market to affect another market. E.g- Bell was offering that if you use their streaming service crave, it won't affect your data and it will be free. It would be a problem with Netflix because they are in that industry, the streaming market. Bell got charged for that) -​ Mergers (heavily regulated by Competition act which means they don't allow it, modify it, reverse a merger that they have allowed or break up a company that is too big) - Horizontal Merger: this is when 2 competing companies merge (burger king and Mcdonalds) - Vertical Merger: this is when a company buys a part of its supply chain (mcdonalds buys the potato farmers that they usually always buy from, Mccain buying the trucking company that ships their potatoes) - Conglomerate Merger: this is when 2 companies that are unrelated to each other, but one buys them out (e.g- mcdonalds buys air canada) Horizontal mergers hurts competition the MOST, conglomerate hurts competition the LEAST, and vertical merger is the second most that hurts competition. ALL Profit Max Curves