Comparing Market Structures

There are four types of market structures which are perfect competition, monopolistic competition, oligopoly and monopoly. Below is a table indicating their differences from each other.

 

Perfect Competition

A perfect competitive market has a large number of small competitors that have no market control. This competition is the ideal. This graph depicts the demand which has a horizontal meaning the price is unrealted to the quanity sold.

Monopolistic Competition
Monopolistic competition is a large number of small firms that compete with product differentiation through advertising. This graph shows the demand for a monopolistic competition. The demand is downward sloping indicating that is elastic. It means that the quantity is affected by the price of the product. An demand for an elastic product means that there are available substitutes.

Oligopoly

Oligopoly is a few large firms that have non-price competition through agreements made between both large firms. These agreements affect the quantities produced and the fixed price of the product. The graph illustrates the demand for an oligopoly market which is a downward slope. The market is inelastic as the change in price has no affect on the quantity demanded.

 Monopoly

A Monopoly market is made up of one firm that has control over the quantity produced and the price of the product. This market is very difficult to enter into. The graph shows a demand graph downwarding sloping for monopoly. The demand is

inelastic as the price has no affect on the quantity demanded.  The monopoly firms are able to make economic profits also in long-run.

Oligopoly and Game Theory

Oligopoly is a few large firms that control the market. Entry into this market is very difficult. Oligopoly is at the complete opposite end of the spectrum from perfect competition. Monopolistic competition is located in between oligopoly and perfect competition. Entry into the monopolistic market has free entry that is similar to perfect competition. Oligopoly is very difficult to enter as it has numerous firms that dominate the industry. In oligopoly there is no competition as there is no product differentiation between the other firms. They do have control over their prices. In monopolistic competition there is product differentiation and price competition. A monopolistic competitor has some control over their prices. In perfect competition the prices of products are lower as there is no competition between the firms.

Game theory is the method that John Neumann and Oskar Morgenstern defined in the 1940's as the firms accounting for the decisions they make or what other firms decisions will have on each other. It identifies the different solutions or ideas in a payoff matrix. The payoff matrix is highly effective as it distinguishes the different decisions that firms have. In the market of oligopoly it is controlled by self interest and are untouched by Governments. It allows the ability for individuals to get what they want. Collusion is an agreement between the firms to identify they quantities each are able to produce or fixed prices. The cartel is an agreement of firms acting as one rather than two.  

Monopolistic competition is the best choice for the market type as is made up of various firms and have differentiated products. There is constant price competition that is favourable to the consumer. The consumer will be the one benefiting from this competition as they will get the lowest price for the products desired. I feel like I am in control of my purchasing choices. By the firms advertising to inform and draw consumers to purchase their products we have the information needed to make a decision of purchasing.

Defining Monopolistic Competition

Monopolistic Competition is small firms that control the prices of the product and have similar products.The customers preceptions of products result from product differentiation. Producers consistantly identify their product as different/ better than any other products on the market. This is important to producers are it will allow them to create an image for their products.

Competing as Starbucks

Perfect Competition is stated that it is the idea that no producer or consumer can determine the price of the product. Starbucks speciality coffee products are the highest prices in the coffee industry. Starbucks has sacrificed the customers preferences over increasing efficiency. The demand for Starbucks has decreased due to they have introduced automatic espresso machines, no in-store coffee grinders and bagged roasted coffee. These factors increase efficiency and decrease the customer service and the coffee aroma in the stores. Starbucks has decided to close numerous stores due to decreasing sales. The store closures will have an impact in their short-run and long-run costs. In the short-run they will have less stores which will decrease the amount of stores available to the customers. In the long-run Starbucks will be paying the pre-tax charges, severance costs and the costs of future lease obligations. Increasing the efficiency in their stores has now forced them to re-evaluate their business practises.

Starbucks coffee prices are expensive for the size of their products. Starbucks offers high-end speciality coffee products. I like Starbucks lattes and when I decide to purchase one, I think of opportunity cost. The opportunity cost is the choice of an alternative product to a product. Starbucks competitor is Tim Hortons as they have started to offer speciality lattes. I can purchase two Tim Hortons coffees for the price of one Starbucks latte.

Below are links to the articles indicating the store closures and examples of increased efficiencies in the stores.

http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html
http://www.cbc.ca/news/business/story/2008/07/01/starbucks-closures.html
http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html

Long Run Costs and Economies of Scale

Chelsey's Wedding Invitation Design Company is an interactive website that allows one to customise their wedding ivitiations. The website has simple designs and online step by step tutorials on how to customise a wedding invitation. One has the ability to upload pictures, select their formatting and their paper. There are various types of speciality paper for all wedding themes. Invitiations are shipped out quickly and efficiently for all time lines.

The size of Chelsey's Wedding Invitation Design Company is small-based family company. The market that this company targets is engaged couples. There is a huge market for wedding stationary in Canada. Couples require invitations to invite people to their wedding.

The wedding market is highly trendy and involves planning and keeping up on unique ideas which is a long-run cost for this company. For marketing this company will need to be involved in all of the social media to have their business spread. Chelsey's Wedding Invitation Design Company would like to eventually spread out into the other types of stationery's needed for weddings (eg. Programs). This company has increased their budget for the latest technology for printing and web design. The anti-virus needs to be updated monthly. The fixed costs are the number of employees, the rental building used to produce the invitations.

A business that is similar is Invitations by Dawn. A strength for this company is when searching wedding invitations in google they are in the top search list. This company offers all types of different wedding stationary needs. Their company is easy to navigate and have a variety of different shipping options available. A weakness for this company is they do not take paypal which does not appeal to all customers. Most people would be hesitate to input their credit card on a non-secure site.

Below is a link to Invitations by Dawn
http://www.invitationsbydawn.ca/

Law of Diminishing Returns

Law of Diminishing Returns is the production process where one input increases while the other inputs stay constant. When one input increases there will be a point where the marginal product will begin to decrease and causes a diminishing return.

Lemieux states that there are diminishing returns to tobacco legislation. I will examine this article and explain the main points and how it relates to Microeconomics.The main points in the debate are: People that smoke will become numb to the health risks and graphics posted on the cigarette packs. The Government will need to keep escalating the percentage of the graphics on the packs. The most people who have already quit smoking are not smoking and the people who are smoking are still smoking despite the graphics posted on the packs. In the 10 year period from 1985-1995 every 2.8% increase in taxes 1% of smokers quit. In the 4 year period from 1995-1999 every 4.36% that taxes were increased 1% of smokers quit (p.3).

The point that lessens the argument for me is Lemieux states that the consumers will try to get around the Government taxes & regulations by smuggling cigarettes (p. 6). This lessens the debate as Lemieux is for increasing the graphics on the cigarette packs and increasing the taxes to a point of decreasing returns to regulation.

I estimate that the point of diminishing returns for the Government is any increase in the rate of intervention above the period from 1995-1999. From 1995-1999 the rate of smokers quitting was 2.75% per year and in the prior 10 years the rate was only 1.8%. In the 10 years prior the tax increase was 5.2% a year as from 1995-1999 the percent of tax increase was 12%. This increase of 12% from 5.2% saw a jump of .95% year over year in the number of quitters.

Lemieux states that prohibiting more "public places" could provide a solution that would increase the government's production and decrease their diminished returns.

Since smokers are quiting there will be a drop in demand which will cause surplus of cigarettes. A surplus would typically cause a drop in price. However assuming the government taxation includes a price floor it will be difficult to increase demand for the cigarette firms.

This will affect Sin Taxes as the lower the demand means that simply raising the tax rate will necessary raise the tax revenue equally creating a more elastic demand.


Lemieux, P. (2001, Mar 19). The Diminishing Returns to Tobacco Legislation. The Laissez Faire City Times. Retrieved on January 30, 2012 from http://www.pierrelemieux.org/artdiminish.html

Tourism industry in Canada

The tourism industy can be related to cross elasticity of demand and income elasticity.  Income elasticity is a measurement of the change in income and the time the quanity demanded for products and services witll increase or decrease. Gailloreto (2012) defines tourism as " accommodation, transportation, restaurant, retail, museum, outdoor adventure, car rental, taxi, performing arts, heritage, culture, sports, festivals, events, wine and beer tasting, golf, spa and other sectors"(P3). Currently the tourism industry in Victoria, BC is on a downward slope as people are unable to afford to travel to Canada as it is expensive. Gailloreto (2012) states that Victoria is working with "the Tourism Industry Association of Canada, to make our border more amenable to travel while keeping it safe"(P7). Canada is a expensive country to travel to and Victoria has recongized this and are working to find a way to decrease the air fares (Gailloreto, P7). Victoria is implementing campaigns and the media to get Canada's name to all of the tour operators and travel agents (Gailloreto, P8). By Victoria working with all types of advertising and different campigns to promote the tourism in Canada it will allow tourism to increase.

The tourism industry in Victoria has elasticity degree of elastic as there are still people travelling to Victoria just not as many as there could be. In the income elastic is normal products as travelling is considered a luxury and the coefficient is < than zero. Income has an affect on if people can afford to travel or if they can only afford to have the nessessities. Below is a diagram of income elasticity.

Gialloreto, R. (2012, Jan 06). Tourism - huge impact hardly noticed; despite contributions to economy, public funding keeps plummeting. Times - Colonist, pp. A.11. Retrieved on January 25, 2012 from http://search.proquest.com/docview/914601693?accountid=13652 http://search.proquest.com.libresources2.sait.ab.ca/docview/914601693/fulltext/134815C79F35D2D49C9/100?accountid=13652

Elasticity & Revenue

I recently read an article explaining the relationship between price elasticity and total revenue. Bond (1998) states that the "musicians in Montreal believe they should be paid the same as their counterparts with the Philadelphia Orchestra"(P3). The Montreal Orchestra is part of a union which has demands on the requirements the Orchestra should pay the musicians at. Bond (1998) examines the following demands: Subsidies from Quebec, Income from the Orchestra and the sales of tickets. There is a correlation between the ticket sales and total revenue which can be defined as elasticity(P7). This concept of elasticity allows businesses to analyze the changes in prices and how it will impact their total revenue. In order for the Orchestra to increase their total revenue they require time to increase their audiences/ticket sales.

Bond (1998) states the  "union has threatened to boycott rehearsals" and "without rehearsals the performance would suffer-poor performances result in low ticket sales"(P20). The below graph indicates the relationship between elasticity and total revenue. Ticket sales are required in order to make revenue. The musicians need to be at rehearsal to increase their performance and ticket sales. The musicians want an increase in salary and get the same compensation like the Philadelphia Orchestra. If they do not receive the increase they will not attend rehearsals. The ticket sales will start to decline as the musicians are not rehearsing. Since the ticket sales are declining the price begins to decrease as well. The upper part of the demand curve is elastic which indicates the price falls and the total revenue will increase. The lower part of the demand curve is inelastic and the price falls and so does the total revenue.

Bond(1998) explains that the Montreal Orchestra needs to increase the number of concerts and prices of the tickets to have a result of increased salaries for the musicians(P16).

Bond, D. (1998, Jul 18). Montreal musicians hit sour notes: Unreasonable wage demands hold possibility for pianissimo finale rather than fortissimo encore. The Vancouver Sun, pp. E.21-E21. Retrieved from http://search.proquest.com/docview/242862051?accountid=13652

 http://search.proquest.com.libresources2.sait.ab.ca/docview/242862051/13480AEB5742973A9ED/8?accountid=13652

Graphing Changes to Demand

Looking at the graphs on pg 50 and 51 illustrated the changes in graphing of the demand production. The following factors determine if the demand will increase or decrease:

• A substitution effect - is when a consumer can purchase a similar product at a different price.
• Income effect - a consumer could have received a increase in their income would then have an increase in the quanity demanded for the product.

I go to the grocery store ever sunday and I am not very picky on the products I buy. I will usually buy yogurt and other products. I go to the area where the yogurt is and compare the quanity and prices of each similar items. I usually am not loyal to one brand of product. This is an example of a subsitution effect. I am purchasing similar products at a much lower price - which ever one is usually on sale that week.

This can be represented in the below graph.

Games about the Economy & Marketplace

I decided to play the McDonald's Video Game & Dinner City. The McDonald's game allows you to manage the cows/grain (supply) and the sales of the burgers with numerous customers. The Dinner City allows you to manage your business and the decisions you choose. I found it interesting when you make a move it affects the whole business. The price influences your decisions to buy certain additions to a business. If you are able to increase your seats of your restaurant by 2 and it increases your revenue by $5 for a price of $400 it could be worth it in the end. One must spend money in order to make money. To increase the demand of the products can be done by advertising, see what the customers preferences are and see the prices of similar products to yours. To increase the supply is done by researching the number of suppliers for the products, the prices of the resouces to make the products and the future agreements of suppliers. A couple tips:  I found that if I rewarded my employees they kept working without any issues. I also found that there were some threats at my restaurant from the global environmentalists. I hired a politician to keep it the issues/threats under the raps. Both games allowed a more rounder/fuller picture of the challenges that an economic system/ Diner City/ McDonalds face from managing the supply and sales of the products.

Production Possibilities

Economies function by examining all of the possibilities that will allow the society to grow. A society’s resources and technologies play a huge deciding factor on what the society will choose to produce. The scarcity of resources and technologies impacts the economy and makes them unable to produce everything the society needs.

A Production Possibilities graph associates the efficiency of resources and new technologies that are available to a society.  This graph assists in comparing two different economies and their choices.  Each society has different values of the types of goods or services they would like to produce. If an economy decides to produce 5,000 tons of fuel the next best option would be to produce 10,000 tons of corn given their resources. The society can grow as an industrialized nation and or to satisfy the people's needs and wants. This is called an opportunity cost which the economy can compare which is more products are suiting for their society - the production of fuel or corn. By societies specializing in certain products this enables other societies to do the same and encourages trading. An economy's manufacturing costs increase the cost of the item will rise as well; this is called the law of increasing costs. Societies can focus on increasing production of an item which in turn diminishes production of other items they produce. This causes the items to increase in value due to the scarcity.

Scarcity is involved in everyone's life whether you are a student, working full-time or unemployed. I work full-time, getting married in 2012 and taking a microeconomic class. I face a scarcity of time. I leave my house at 6:30am and get home at 6:00 pm every night. I have to allocate my time according to what is important. By placing a value on a decision and comparing it to another valued decision I am able to use the next best choice. One significant opportunity cost that I have experienced by returning to school is deciding to take another course to excel in my job or focusing on my upcoming wedding. We are all faced with these decisions and by using the opportunity cost we are able to make a choice.