Welcome back to my blog! Last time, we talked about monopoly structure, For this blog, we will discuss the oligopoly market structure.

Oligopoly market structure have few firms and high barriers to entry. Example for this market structure including Coca-Cola and Pepsi.

Oligopoly market structure has  five characteristics:

• Dominated by a few firms
• High or substantial barriers to entry
• Differentiated & undifferentiated products
• Uncertainty and risks associated with price competition may lead to price rigidity
• Non-price competition, which means firms will  compete only through advertising& promotion, brand proliferation, market segmentation, and product innovation.

Contestable market theory was developed by William Baumol in 1982 to explain why in some monopoly or oligopolistic markets, firms may operate in a competitive manner which will enable consumers to obtain the benefits of economies of scale and lower prices as well as reducing the welfare losses associated with markets dominated by a few firms. [1] The equilibrium position for a firm in a contestable market will be closer to that predicted by perfect competition than monopoly or oligopoly.

In the theory of contestable markets, If a company in a monopoly or oligopoly market believes that by fixing high prices and earning supernormal profits, it is possible to attract new companies to enter the industry, and these companies may occupy the market, then it may set the price at equal to or relatively close to the average cost level to prevent this from happening. This strategy of setting the price below the price that can maximize corporate profits to prevent new companies from entering the market is called limit pricing. In order for this strategy to succeed, existing companies must accurately understand the cost structure of potential entrants. This will enable the existing companies to set the price below the lowest average cost of potential new entrants, which means that they will not be able to set a price that will make them profitable. Another advantage of price fixing is that it reduces the possibility of monopolistic companies attracting the attention of a country’s competition authority. Obviously, the level of competition in a market will depend on how easy it is for new companies to enter the industry. Therefore, no entry barriers or low entry barriers are the key to determining this. For any potential new entrants, the standardization of products and their access to the same technology as established companies are also very important.

Thank you for your reading! It’s my pleasure to sharing these economics knowledge with you!

[1]: https://www.investopedia.com/terms/c/contestablemarket.asp

Welcome back to my blog! Last time, we finished the discussion of the perfect competition market. In Today’s blog, I will begin to introduce the Monopolistic market.

Monopoly is completely opposite to perfect competition, there is only one firm in the whole market, and the single supplier constitutes the entire industry.

The Monopoly market have four features:

• A single seller
• No close substitutes
• High barriers to entry
• The monopolist is a price make

There is a term named natural monopoly, which describe the market situation where a monopolist has overwhelming cost advantage. This situation Usually happens when there is only one person have the ownership of scarce resources, or there is a public ownership of essential goods and services (water, electricity, gas, railway, canals, etc). For example, Chinese government is the only institution which control the the water, electricity, and gas resources in the country, thus we can say that Chinese government is the natural monopolist of water, electricity, and gas in China.

Why could the monopoly market exist? Well, the first reason is the Legal rights given by the government. Like the important public service, government will control those products with high scarcity but are essential to people’s lives, so as to avoid the emergence of sky-high prices of necessities. Secondly, First mover advantage. The first one who entry the market will take the advantage of monopoly. Thirdly, Economies of scale. With the expansion of the company, they will have a high output with low average costs. The branding effect can also be the reason for the existence of monopoly, due to the extremely high brand Loyalty.

Economics believes that the monopoly market structure also create problem. A monopoly may abuse its market power to restrict market supply in order to force up market price and consumer choice. What’s more, monopolist may cut product quality to save costs. Monopoly will also cause x-inefficiency, because People may become unmotivated due to lack of competition. Just a reminder! I mentioned in my pervious blogs that X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. [1] Moreover, monopolist will artificially create barriers to restrict competition. For example monopolist will threaten major suppliers that it will stop buying from them if they supply rival firms, and it will threaten retailers to stop supplying them with their product if the retailer stock rival products. Thus the situation of monopoly need to be regulated.

Reference:

[1] https://www.economicshelp.org/blog/glossary/x-inefficiency/#:~:text=X%20Inefficiency%20occurs%20when%20a,will%20not%20be%20technically%20efficient.

Welcome back to my blog! Last time, we began to introduce the perfect competition market. In Today’s blog, I will begin with the introduction of  long run and short run situation for this market.

Just a memory recall! The perfect competition market is an ideal market structure that has many buyers and sellers, with identical or homogeneous products and no barriers to entry.

Generally speaking, a perfectly competitive firm could be making super normal profit, a loss, or just normal profit, depending on the given market price In the short run. If the firm’s losses get too big in the short run (Like I mentioned in my last blog), then it will have to shut down.

In this diagram above, the firm wants to maximize profits at a given price P1, so it produces at point A (MC = MR) with the output Q1. At Q1, Average Revenue is greater than Average Cost, the distance AB is the profit per unit, total super normal profit is the area ABCP1 (the green box = profit per unit times output Q1 ).

In this diagram, at price P2, Average Cost curve is above the Average Revenue curve at all levels of output. The firm will want to minimize its losses, and that can be done when MC = MR at point D giving output Q2. At Q2, Average Revenue is less than Average Cost, and the distance DE is the loss per unit, so the total loss is the area DEFP2 (the red box = loss per unit x output Q2).

In this diagram, at given price P3, MC = MR occurs at point G, giving output Q3, at this point Average Revenue is equal with Average Cost, so the firm is making normal profit.

However, in the long run, all firms in a perfectly competitive market earn only normal profit. Firms are both allocative efficient (Price = MC) and productively efficient (at equilibrium output, MC = AC). A market has not failed if it is efficient in both ways (That is exactly what I mentioned in my first blog).

In the diagrams above, at initial market  price P1, each firm’s demand curve is D1. MC = MR occurs at point A. Average Revenue is greater than Average Cost, so each firm is making super normal profits. New firms will be attracted into the market since this super profit exist, and shifting supply curve to the right. This will keep happening until all firms earn only normal profit. Once S1 shifted to S2, at P2, every firm in the industry will be earning normal profit, no incentive for any new firm to enter or leave the industry. This is the long run equilibrium.

That’s all for the perfect competition market. Next time, we will talk about the Monopolistic Competition market.

Welcome back to my blog! In my last blog, we discussed about the different cost curve and the relationship between each other. In today’ s blog, I will introduce the different market structures.

Economics are mainly focused on the characteristics of a market, which include how many firms compete to supply it, the degree of competition between them, the extent of their product differentiation, and the ease with which new firms can enter the market to compete with them.

The first one I want to discuss is the perfect competition market. This is an ideal market structure that has many buyers and sellers, identical products, and has no barriers to entry.

The perfect competition market has five features:

• A large number of buyers and sellers
• Price taker: no influence on market price
• Identical products
• Completely free to enter and exit
• Perfect information

It is possible to analysis this market structure diagrammatically. The left picture shows the market’s situation, and the picture on the right shows each firm’s situation. The market demand curve for a normal good is downward sloping and the market supply curve is upward sloping. In the situation of perfect competition, each firm is a price taker setting their price at the market price P1. Each firms’ demand curve is perfectly elastic which means they can sell as much as they want at the given market price. It’s impossible for any firm to lower its price below P1 to try to sell more, since each firm can sell as much as they want at price P1.

Initially the market price is P1. Each firm has an individual demand curve D1 which also represents their AR(average revenue) curve and MR(marginal revenue) curve. Each firm tries to maximize profits. This occurs where MC = MR (If you forget about this point, please check my previous blogs to recall your memory!). At P1, MC = MR occurs at point A, output is Q1. If demand curve shifts to the right, price will rise to P2, MC = MR occurs at point B, output is Q2.The marginal cost tells the firm its supply for any given price. Hence, the marginal cost curve is the firm’s supply curve.

Now add firm’s short-run AC and AVC curves.

At P1, AR > AC, the firm is making super normal profit.

At P2, AR = AC, each firm is making normal profit (breaking even).

At P3, AR < AC, each firm is making a loss. But, AR > AVC. This means firms can still pay wages, raw materials etc. What the costs can’t cover are some fixed cost, but firm can keep operating.

Below point S(shutdown point), the firm has to shut down even in the short run. For example, at P4, AR < AVC. The firm cannot even cover its variable cost, then they are in real trouble! They must shut down.

That’s all for today’s blog! For the next blog, I will begin with the illustrate the long run and short run situation for the perfect competition market.

Welcome back to my blog! Today, we will discuss more about cost curve

This graph is exactly same with the graph I posted in my last blog. Last time, we discussed about the meaning at point A and B. Today, we will begin with the discussion of point C.

At point C on the left diagram, each worker adds fewer units to total output than the last (diminishing marginal returns have set in). But each worker is still paid the same wage, so each marginal unit that this new worker produces will on average cost more than the units produced by the last worker. Hence, the marginal cost curve must be rising (see point C on the right diagram).

After the introduction of the basic cost curve, I want to combine the four different cost curve together in on graph.

As you can see from this picture, The Average Fixed Cost curve is continually falling, at a slower rate towards the end because a fixed number is being divided by an ever-increasing number. The Average Cost and Average Variable Cost curves start fairly high, fall, and then rise again. It is because initially the totals are being divided by very small numbers, giving large averages.

The Marginal Cost curve cuts the Average Cost curve and Average Variable Cost curves at their minimum points.

Then is the long run and short run cost curve.

In the long run, all factors of production can vary, including capital. Over a period of time, most firms experience lots of ‘short runs’, which, together, make up the long run.

Assume the first short run average cost curve (SRAC1) represents the printer firm with four machines. Over the longer run, the firm may decide to invest in another machine, and move to SRAC2. The curve is lower than the last. This is because of economies of scale. As a result of being bigger, the firm finds that its cost per unit has fallen.

In a year or two, the firm might invest in a sixth machine, and move to SRAC3. There is a danger that the firm might get so big that diseconomies of scale occur.

Just a reminder, economic of scale refers to cost advantages, or falling average cost per unit, that an enterprise obtains as the scale of output is increased in the long run. It can be divided into two part: Internal economic of scale, which means the advantages gained by internal growth of firms to lower per-unit costs, and External economic of scale, which means the advantages gained from the growth and improvement of a firm’s industry or a region. All firms benefit from it.

Welcome back to my blog! In my last blog, I introduced some different “revenues” and the relationship between their graphs. Today, before we will talk about different cost curve, we will initially discuss four concept, which will help us to understand different cost curve.

Total product is the quantity of output produced by a given number of workers over a given period of time. The amount of capital (machines) is fixed.

Average product is the quantity of output per unit of input. For example, if the input is labour, average product is the output per worker.

Marginal product is the increase in output that occurs from an additional unit of input (labour). As the number of workers increases, the marginal product declines. This is referred to as diminishing returns.

Diminishing marginal returns, which means that the output from an additional unit of input leads to a fall in the marginal product.

Just like last time, There are few concept about cost that we need to be familiar with.

Firstly, the Economic cost – This is the opportunity cost of production, value could have been generated had the resources been employed in their next best use.(just like what we discussed in last semester)

Secondly, Accounting cost, which is the actual input for the business.

Thirdly, Fixed cost, which is the costs that do not vary as output increases. For example: rent, office costs and, machinery.

Fourthly, Variable costs, which is the costs that vary as output increases. For example: raw materials. If a firm wants to make more chocolate, it will need more cocoa beans and sugar, then, the coca beans and sugar will be count as the variable cost.

The last one, Semi-variable cost. For example— Labour, many firms have a fairly permanent staff. If they need to increase output, the workers will be asked to do overtime, this is variable because the hours worked will rise, but the actual number of workers may not.

The calculation between different cost are including Total cost, Average cost, and Marginal cost.

Toal cost (TC) is the total cost to the firm of producing a given number of units, and the formula is given by: TC = Total Fixed Cost + Total Variable Cost

Average cost (AC) is the cost per unit of output produced, and the formula is given by: AC = TC/output or AC = Average Fixed Cost + Average Variable Cost.

Marginal cost (MC) is additional cost incurred from producing one more unit of output. It is the extra cost by producing the marginal unit of output. The formula is: MC = change in total cost / change in quantity.

It is also possible to illustrate these cost diagrammatically.

In the top diagram, the marginal cost curve falls to start with and then begins to rise, the average cost curve only starts to rise when the marginal cost curve rises above the average curve. That is because At point A, each worker adds more to total output than the last. But each worker paid the same wage, so each marginal unit will cost less, hence, the MC curve must be falling.

The bottom diagram shows the marginal product curve and the average product curve. Notice! At point B on the bottom diagram, each worker adds the same amount to total output then the last. Each worker is paid the same wage, so each marginal unit will cost the same on average. Hence, the marginal cost curve must be constant, or flat (see point B on the top diagram).

That’s all for today’s blog! We will illustrate more about cost graph in next blog!

Welcome back! In the last blog, we analysis the relationship between income &substitutional effect and the demand of products. Moreover, we illustrate how to analysis the income effect and substitutional effect through graph. In today’s blog we will firstly introduce the cost, revenue, profit, and shout-run& long-run production function.

There are few concept that we need to be familiar with.

Firstly, Revenue. The revenue of a firm means receipts of money from the sale of goods and services over a given time period. Some people also refer to the revenue as turnover.

Secondly. Total revenue (TR), which is calculated by multiplying the quantity sold by the price at which the goods were sold, TR = Price × Quantity.

Thirdly, Average revenue (AR), which is the amount of money received, on average for each good sold. AR = TR/Quantity = Price.

The last one, Marginal revenue (MR), which is the revenue received from selling one more unit of output. It is the extra revenue at the margin (i.e. by selling marginal unit of output).

This graph below successfully summarize the relationship between total revenue, average revenue, and margins revenue.

In the top diagram, the downward sloping demand curve is average revenue and marginal revenue curve, which is falling twice as fast as average revenue curve. When marginal revenue falls, the extra revenue gained from the sale of the last unit is falling with every unit sold, but it is still positive. This is why the total revenue curve keeps rising,  but at a declining rate (decreasing slop).

The total revenue curve is at a maximum when the marginal revenue curve cuts the x-axis (MR = 0). The last unit sold added no revenue to the total, so the total revenue curve remains unchanged (it is momentarily flat). As successive marginal revenues are negative, the total does finally fall.

If the demand curve is perfectly elastic, the situation will be like this:

The perfectly elastic average revenue curve is flat, because any change in price will lead to zero in quantity, The marginal revenue must be the same value as the average revenue. So the two curves are the same.

As marginal revenue is constant, the extra revenue added to the total every time a unit is sold is the same for every unit. Hence, total revenue is continually rising and at a constant rate.

That’s all for today’s blog, In the next blog, we all talk about different cost curve.

Welcome back to my blog! In today’s blog, I will introduce you the relationship between income &substitutional effect and the demand of products.

Generally speaking, Substitution effect moves quantity demanded in the opposite direction to the price change: when price decreases (increases), substitution effect works to increase (decrease) quantity demanded; Income effect can work to either increase or decrease the quantity of a good demanded, depending on whether the good is normal or inferior.

It is possible to illustrate the substitution and income effects of the fall in the price of a good diagrammatically.  We begin by identifying the substitution effect. In order to do this we need to remove the income effect which is achieved by drawing in a new budget line, SV, parallel to the new budget line (RT), but tangential to the original indifference curve (I1). This leaves the individual on the original indifference curve and shows how much of good B would have been purchased had their real income not been increased. The movement from X to Z represents the substitution effect. The rest of the movement from X to Y is, therefore, the income effect.

It can be seen that when the price of good B is reduced the change in the quantity demanded resulting from the substitution effect is the movement from B1 to B3 and that resulting from the income effect by the movement from B3 to B2. In the case of a normal good ,the income and substitution effects of the price fall have worked in the same direction in order to bring about an increase in the quantity of B demanded.

This graph illustrates the situation for an inferior good.

An inferior good is one for which the quantity demand will fall as consumers’ income rises. In this case the substitution and income effects move in opposite directions. The substitution effect increases the demand from B1 to B3, but the negative income effect moderates the increase to some extent and will reduce the consumption of B from B3 to B2.

The final graph illustrated a Giffen good.

Giffen goods are generally regarded as goods of low quality which are important elements in the expenditure of those on low incomes. A good example is a basic food such as rice, which forms a significant part of the diet of the poor in many countries. The argument, not accepted by all economists, is that when the price of rice falls sufficiently individuals’ real income will rise to an extent that they will be able to afford more attractive substitutes such as fresh fruit or vegetables to make up their diet and as a result they will actually purchase less rice even though its price has fallen. In this case, the negative income effect (B3 to B2) completely outweighs the substitution effect (B1 to B3).

That’s all for today’s blog! For the next time, we will talk about different market structures.

Welcome back to my blog! Last time, we cover some concept about utility, which can be defined as a want-satisfying power, the satisfying or pleasure one gets from consuming a product. In today’s blog, I will introduce the Indifference curve and Budget line.

Indifference curve shows the different combinations of two goods that give a consumer equal satisfaction (utility).Here are some features of indifference curve:

• Higher indifference curve represents higher levels of utility
• Downward sloping
• Cannot cross
• Concave

Budget lines shows the combination of two products obtainable with given income and prices. The emerge of budget is due to the fact that all individuals must face two facts of economic life: have to pay prices for the Good&Services they buy, and have limited funds to spend. Budget Iine is somehow similar to the production possibility curve that we covered in the last semester. Both of them show the limits, but the main difference is that the production possibility curve is showing the production with limited resource, and the budget is showing the consumption with limited funds. All the points on the budget line and below the budget is affordable, but all the points above the budget line is not affordable, and they does not exist.

Budget can be changed by two reasons. Firstly, the change in income. Increase in income will shift the budget line upward (and rightward), and decrease in income will shift the budget line downward (and leftward). Keep it in mind that all shifts are parallel, which means that the changes in income do not affect the budget line’s slop. Secondly, Changes in price. In each case, one of the budget line’s intercepts will change, as well as its slope. When the price of a good changes, the budget line rotates, and both its slope and one of its intercepts will change.

While a rational consumer is making decision. He or she will buy one product on the exact point where the budget line is intersect with the indifference curve. At that point, the consumer’s utility is maximized, because he or she is spending all the money that he have on the two product, and gaining the equal satisfaction from these two product. Remember what we said in the last blog? “while the utility that the consumer gain from each product is same, the consumer will have the maximum utility”.

After the discussion of Indifference curve and Budget line, I will introduce the Substitution effects and Income Effect.

Substitution effects (change of relative price) means that as the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed. Income effect shows that the increase in income will shift the budget line outward.

What is the relationship between these two effect and the demand of products? I will solve this problem in the next blog.

Welcome!

In the last semester, I introduced several topics about Microeconomics including efficiency, supply&demand, price elasticity, externality, market failure… For this semester, I decided to continue the introduction for Economics. If you are interested in economics, Please follow my blogs!

The first topic for this semester is Utility.

Utility can be defined as a want-satisfying power, the satisfying or pleasure one gets from consuming a product. However, utility and usefulness are not synonymous. For example, A painting by Picasso may offer great utility to an art connoisseur, but the painting itself is useless functionally. Utility is a subjective concept, since the utility of a specific product may vary widely from person to person. Moreover, Utility is difficult to quantify. Anything that makes the consumer better off is assumed to raise his utility, and anything that makes the consumer worse off will decrease his utility.

What economist mainly focus on is the Marginal utility, which is the additional utility derived from the consumption of one more unit of a particular good. Economist found that every decision maker(consumers) are always trying to make the best out of any situation, thus marginal utility theory treats consumers as striving to maximize their utility. However, economist also found an interesting phenomenon, that marginal utility falls as the consumption increases.

Here is a graph which describes the marginal utility and total utility.

If successive units of a good yield smaller and smaller amounts of marginal utility, then the consumer will buy additional units of a product only if its price falls. Diminishing marginal utility supports the idea that price must decrease in order to increase the quantity demanded, and it also confirm the idea that I mentioned in my third blog— “demand curve normally have a downward trend”.

In considering the consumer’s equilibrium, consumers have limited incomes, behave in a rational manner and seek to maximize their total utility. So here is the question: How do they maximize their total utility while making choices?

From an economic perspective, the answer is “Equi-marginal principle”. Consumers maximize their utility when their marginal valuation for each product consumed is the same, thus it is not possible to increase total utility by switching any expenditure from product A to product B. We normally use an equation to explain this.

That’s all about utility. For the next blog, I will introduce the Indifference curve and Budget line, as well as the income effect and substitution effect. See you next time!