How Firms behave and the Interest of

Consumers

Competition Competition exists to attract maximum

number of customers

Price competition

Non-price competition by creating want for their product through advertising, free gifts, favorable credit terms, installments.

What is a market? A market is not a place.

It is a mechanism, a setting which allows people to exchange goods and services with each other.

It is made up of producers and consumers.

For the economist, anyone, anywhere, who wishes to buy or sell g/s is a market.

Importance of Market structures In a market, the firms decide the level of

output and price.

These two decisions depend upon the kind of market the firm is in and the conditions it faces, such as number of firms it is competing with.

Importance of Market structures Through analyzing Market structures we come

to know:

a) The level of competition amongst firms in an industry

b) Consumers are over charged or notc) Best use of resources is being made or not

The job of an economist is to suggest the optimum resource utilization.

Market Structure 1. Perfect Competition

Best resource utilization by firms facing many competing firms.

Firm providing best quality g/s at the lowest prices will be most successful.

Competition increases efficient and effective use of scarce resources

Consumers are given best value for money

Characteristics of Perfect Market1. Homogenous Product

2. Price takers

3. Perfect information

4. Freedom of entry and exit

5. Normal profit

No perfect competition exists…. Perfect competition gives the perfect use of

scarce resources.

Resource utilization by a firm can be judged against it to know how good or bad a firm is doing.

Why does perfect competition make the best use of scare resources?1. Low prices – competition, prices low, for

attracting more customers

2. Efficiency – Firms making poor use of scarce resources resulting in poor quality products will go out of business.

3. Consumer sovereignty – consumers get what they want.

Market Structure2. Monopoly

Opposite of Perfect Competition.

Only supplier of a particular good or service.

A small group of large firms may agree to work together to become a type of monopoly, trying to keep their prices and profits high. (Sugar)

Cartel or price fixing ring of firms.

They will agree not to compete with each other on prices but compete on non-price competition.

When large companies combine to control the supply of a commodity, they are called oligopolies.

( Small firms in large quantity are called Oligopolies)

Features of a Monopoly1. No competition

2. Abnormal profits

3. Price makers

4. Barriers to entry

5. Imperfect information

6. Non-homogenous products

How monopolies prevent competition?

Two main types of barriers:

a) Natural barriers

b) Artificial barriers

Natural barriers

1. Control of supply (if new company came, a supplier is not allowed to provide its commodities to the

new company, otherwise the first company or monopoly will break its link)1. Economies of scale - natural monopoly

1. Expense – loads of money is required (if new competitor came, the first monopoly will reduce its prices so that it will get

more customers and normal profit, but the competitor can not decrease the price because he will get the loss)

1. Legal consideration – patent(e.g. Pepsi vs. RC Cola) Pepsi members break all the bottles of RC COLA so that their business can run more) they make a deal with government too.

Artificial barriers

1. Restrictions on supplies

(a new competitor will not be allowed to sell his product through that monopoly which is taking the commodities from the supplier and selling it to the people.

1. Predatory pricing

2. Exclusive dealing

Advantages of a Monopoly

1. Economies of scale & natural monopolies.

1. R&D

1. Lower prices

Disadvantages of a Monopoly

1. Poor levels of service

2. Low output and high prices

3. Producer sovereignty

Government laws and Monopoly 3 basic policies by Govt to control Monopoly:

1. Prohibition

1. Take-over

2. Regulation

Privatization Sale of shares in Govt owned or nationalized industries

to the general public and private sector firms.( 50% share take the government and 50% takes the private sectors)

Also, sale of major assets owned by the Govt.

Joint ventures

However, the Govt keeps large amount of shares.

Arguments for Privatization

1. To stop Govt abuse of monopoly power

1. Increased efficiency

2. Raising revenue

(making more money)

1. Ownership by the people

Arguments against Privatization

1. Private monopolies are formed

1. The public interest is not protected

2. It breaks up economies of scale

3. It does not return ownership to the people

Monopolistic competition Level of competition more than monopoly

but less than perfect competition.

Similar but not same products are supplied by many different firms.

Product differentiation

….Monopolistic competition Features are same as monopoly and perfect

competition

Monopoly – name (for example lays)

Perfect – free to enter and exit

Brand names and branding

Advertising Persuasive advertising – designed to

create a want for a product that consumers would not necessarily buy.

Informative advertising - increase consumers choice by making consumers aware of the range of goods and services available to them.

Consumer Protection Being fair

Caveat emptor – let the buyer beware

Govt protection

Assignments1. Explain why Research and Development is not that

important in Perfect Competition but holds a lot of significance in Monopoly?

2. When perfect competition doesn’t not exist, why is important to know about it?

3. In perfect competition firms earn normal profit. How?

4. What is the difference between Cartel and Oligopolies?

Assignments

5. Explain the concept of Consumer sovereignty and Producer Sovereignty.

6. Explain how Monopolistic competition is similar to both monopoly and perfect competition?

7. Why persuasive advertising is criticized?

8. What is the concept of Caveat emptor ?

One Group Find out the consumer protection laws of

Pakistan