A.S 3.1

1. A.S 3.1 Understand Marginal analysis and the behaviour of firms

2. SLO: Describe characteristics of a perfectly competitive firm. Derive the demand curve for a perfectly competitive firm given market demand and supply. Calculate Total, Average and Marginal Revenue for firms.

3. A Perfectly Competitive Market • Has the following characteristics • Large number of buyers and sellers (firms) • Firms have no market power and are price takers • Each firm supplies a small amount of the overall market supply • Firms cannot influence the market price by altering its output. • Only able to sell their good at the price determined in the market • Output is homogenous • Product is identical to that produced by other firms • Resources are perfectly mobile • Buyers and firms have perfect knowledge of the market • No Barriers to entry or exit from the market

4. Perfect Competition • Market garden • Uses simple resources • Land, seeds, water, fertiliser, equipment and labour • Price determined by the market • What will happen to the price if demand increases? • What may happen to the price if the growing conditions have been favourable? • NZ examples? • Dairy farming • Wool growing • Fishing

5. Perfect Competition Deriving the demand curve Demand curve for the perfectly competitive firm Market Price S Price 60 50 40 30 20 10 0 60 50 40 30 20 10 0 P D D 1 2 3 4 5 6 Q 10 20 30 40 50 60 Quantity (million) Output (000) Because the perfectly competitive firm is a price-taker it faces a horizontal demand curve. The price is determined by demand and supply in the market.

6. Behaviour of firms in other market structures • SLO:

7. Oligopoly • Has the following characteristics • Few number of large sellers, that dominate the market • Sells similar but differentiated products. • Price is usually similar across the industry • Firms have some control over price • Firms prefer to use non-price competition to provide a competitive advantage • Strong barriers to entry by new firms • Often accused of collusion, as existing firms look as though they act together in their pricing decisions.

8. Oligopoly: Example • Other Examples • New car market • -Ford, Mitsubishi, Toyota, Honda • Fast Food market • - McDonalds, KFC, Burger King • Retail banking market • - BNZ, ANZ, Kiwibank, Westpac • Petrol retailing companies • Few large competitors • BP • SHELL • Caltex • Mobil • Smaller players • Challenge • Gull Sell a homogeneous product. These firms differentiate their product with powerful branding using heavy advertising logos sponsorship and other promotions

9. Kinked Demand Curve If producer reduces price (from P2 to P3) the competitors are likely to follow. The result is a smaller % increase in sales from q2 to q3. (inelastic demand). p d P1 P2 P3 If producer increases price (P2 to P1) the competitors are unlikely to follow. The result is a larger % fall in sales from q2 to q1 (elastic demand) q q1 q2 q3

10. The risk of using Price Competition • A price war may arise ( firms keep lowering prices to try and gain a greater market share. • This may result in a firm or firms being unable to operate and might be forced to leave the market altogether. While the firms that survived, will have to settle for decreased profits (as prices are lower) until the price war is over. • Due to this risk, Oligopolists prefer not to use price competition and stick to using non-price competition.

11. Product Differentiation Make the product appear different Product Variation Make the product really different Non-Price Competition

12. Product Differentiation Location Advertising Branding Packaging Sponsorship Service Loyalty Schemes

13. Duopoly • Has the following characteristics • Market is dominated by two large producers • Have considerable influence on price • Produce differentiated products, with the use of non-price competition • Strong barriers to entry of new firms

14. Duopoly KEY Market Firm

15. Duopoly Examples •Qantas Airways Limited is the national airline of Australia. The name was originally "QANTAS", an acronym/initialism for "Queensland and Northern Territory Aerial Services". Nicknamed "The Flying Kangaroo", the airline is based in Sydney, with its main hub at Sydney Airport. • Mobile firm services • Telecom and Vodaphone (one company owns 2 degrees) • Domestic airlines in NZ • Quantas NZ and Air NZ • Supermarkets • Foodstuffs ( New World, Pak’ n’ Save) • Woolworths Australia (Woolworths, Foodtown, Countdown)

16. Monopoly • Has the following characteristics • One firm known as a monopolist • One firm supplies the whole market or nearly the whole market- has considerable influence on the price by varying quantity it supplies • Very strong barriers to entry and exit • The product it sells has only one or no close substitutes

17. Monopoly KEY Market Firm

18. Monopoly: Examples • Tranz Rail • Inter-island Ferry • Postal delivery service: NZ post

19. Monopsony • Is the sole BUYER in a market • The market is dominated by one large firm that purchases the whole market supply or nearly the whole market • Able to have significant influence on the price by varying the quantity it purchases • Example: Fonterra

20. Fill in the gaps table • Perfect imperfect • Many, few, two, one • Homogenous, differentiated, no close substitues • None, weak strong