market's structure
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PERFECT COMPETIT ION, MONOPOLY, OL IGOPOLY
Market scenarios
PERFECT COMPETITIO
N
Also called “perfectly competitive market”
It is an industry in which:1. There are many suppliers (firms)2. There are many buyers.3. Products are standardized or
homogeneous.4. There are no restrictions on entry
into the industry or leave the market.
5. Established firms have no advantage over new ones.
6. Sellers and buyers are well informed about prices and take those as “given”
Do you think this model is not very realistic?
Well, YOU ARE RIGHT!Even though most of the firms have some
flexibility over their prices, this is a good way to start analyzing firm’s decisions F.i. When a firm increases its price slightly it will
certainly sell less, but the quantity sold will probably not drop to zero.
Remember, firms don’t have to pick a price, they just decide how much to produce.
Monopoly
An industry or firm that:1. Produces a good or service
for which no close substitute exists
2. It is protected by a barrier that prevents other firms from selling that good or service.
Legal.- Public franchise, a license or patent, firms owns control of a resource.
Natural.- In which some factors enable one firm to supply the entire market at the lowest possible cost.
Even in industries with more that one producer, firms often have a degree of monopoly power.
f.i. Microsoft in the Windows operation system today.
Oligopoly
A market structure in which:1. Natural or legal barriers
prevent the entry of new firms.
2. A small number of firms compete.
3. Slightly differentiated goods4. Firms
make decisions considering the reactions of their competitors
5. When there is collusion becomes a Cartel
Other examples:Cigarettes, Breakfast cereals,
Chocolate
WHEN DOES IT OCCUR?
Government’s intervention
Main reasons
1. Supply of public goods and services Paved streets, street lighting, security.
2. Correcting externalities Consequences or side effects of an industrial or
commercial activity that affects other parties.
3. Search for a fairer distribution of wealth The most vulnerable groups.
And, where does the government get the money?TAXES!
Principles for establishing taxes
NeutralityEquityEasy to pay and for understandable reasonsSocial benefit
Subsidies
A sum of money granted by the government to assist an industry or business so that the price of a good or service may
remain low or competitive.
Price control Maximun price: The authority establishes it to make a good or
service more accessible to people. Nevertheless, it ties to protect consumers cause distortions in the market (artificially stablished): Scarcity, Black market
Minimum price: Ensures a minimum income to producers. But, generates discrimination because some of them get benefit from others.
GROSS DOMESTIC PRODUCT,GROSS NATIONAL PRODUCT,
DEVELOPMENT AND ECONOMIC GROWTH, INFLATION AND UNEMPLOYMENT
Macroeconomics
Do you remember Macroeconomics?
The part of economics concerned with large-scale or general economic factors.
It is the study of national and global economy.Accounts for aggregate variables such as inflation,
income, product ion and unemployment.Results are the base for economic policy decisions
.Focuses in two basic issues: 1. Economic Growth 2. Fluctuations in economic performance
Gross National Product (GNP)
Gross Domestic Product (GDP)
Is the total value ofgoods and services
produced by the citizens of a country in agiven period.
Is the total value of goods and servicesproduced within a country over a given
period.Four components:
Consumption Government purchases and, Expenditures Net exports
Macro VariablesThe most important ones are:
GDPComponents of the definition
1. Total or market value means: The prices at which each item is traded in markets
instead of the number of production. f.i. 50 apples (production) Each apple costs $10 then, the market value is $5
2. Final goods mean: An item that is bought by its final user during a
specified time period and its different from the intermediate good which is an item that is produced by one firm, bought by another firm and used as a component of a final good or service.
GDPComponents of the definition
f.i. A Ford SUV final good but A Firestone tire on the SUV intermediate good. A Dell computer final good but An Intel Pentium chip inside intermediate good
Note: If we count the value of intermediate goods and services produced to the value of final goods and services, we would count the same thing many times. So, avoid double counting.
Also, some items that people buy are neither final nor intermediate goods.
Second hand goods: used cars or existing homes
GDPComponents of the definition
3. Produced within a country f.i. Toyota, a Japanese firm, produces automobiles in
Mexico and the value of this production is part of the Mexican GDP not part of Japan’s
4. In a given period of time: Normally either a quarter of a year
Important: The GDP also measures the total income of a country and its total expenditure because it shows the direct link between productivity and living standards.
Gross Domestic Product (GDP)
GDP does not include: Nonmarket transactions (illegal), Intermediates to produce other goods Industries outside the country
Formula:
GDP = Consumption + Private investments + Government Expenses + Exports - Imports
Two basic issues: #1 Economic Growth
GDP’s behavior is observed over time to:Determine if there are advances or setbacks in the
country’s activity.
Then, economic growth is defined when we find that real GDP (GDPR) in a year is greater than the previous one.
Also, economic growth means a expansion of the economy’s production possibilities (PPF)
So there:
Economic Growth Rate = current GDPR - past GDPR X 100past GDPR
What is the GDPR?
Supposed this: In 2010 a GDP of $13,000 billion but, a year before In 2009 it was $12,000 billion
We know now that GDP in 2010 was greater…but why? We produced more goods and services We paid higher prices for our goods and services
So, the Real gross domestic product represents the change in production; is the value of final goods and services produced in a given year when valuated at constant prices. Then by comparing the value of g&s at constant prices, we can
measure the change in the quantity of production.
Two basic issues: #1 Economic Growth
So, economic growth measurement is carried out in order to: Make comparisons of
economic welfare Make comparisons
between countries and, Behavioral forecasting
of the economic cycle
Economic Growth vs. Economic Development
It is not the same to refer growth as development because the last one refers to a larger group of variables that have to be taken into consideration.
Among the variables that are ignored in the calculation of growth but not economic development are:
• Health and life expectancy• Educational Level• Environmental quality• Political freedom• Social Justice• Redistribution of income
Short activity: Debate and analyze
Poverty in Mexico
POVERTY & UNEMPLOYMENT
Economic cycle
What is the economyc cycle?
We consider the economic cycle as the set offluctuations (movements) of GDPR over time.We can identify four elements:
1. Contraction: growth slowdown of the GDPR2. Expansion: accelerate the pace of growth of the
RGDP3. Peak (top): highest point reached in the cycle4. Depression (valley): lowest point reached in the
cycle
MO
NEY
How can countries promote growth?
Searching for these elements:
i. Skilled labor and capital
ii. Investment in research and development
iii. Efficient use of resources
Relative Absolute
When we compareliving conditions withinthe country.
When you can notaccess the minimumconditions for survival.
Poverty
Lack of Resourcing
Political instability Culture of
investment/savings
Educational Level
Causes
Spiral of poverty
There are main variables involved in the worsening of living conditions of society.The variables are:NutritionHealthEducation and,Income
Unemployment
It is considered unemployed anyone over 14 who wants to work and can not find a job.
The unemployment rate is calculated using the economically active population (EAP)
Unemployment rate = # of unemployed agents X 100
EAP
Types of Unemployment
1. FRICTIONAL - Resulting from the normal rotation of jobs (daily creation and destruction).
2. STRUCTURAL - Resulting from changes in technology or skills of workers who are forced to retire from their job.
3. CYCLICAL - Resulting from the fluctuation (movement) of the economy (increases during recession, decreases during the expansion).
PRICE INDEX, INFLATION AND EXCHANGE RATES
Prices and currencies
Is the measure of the average of the prices paid by urban consumers for a fixed “basket” of goods and services.
Also,
Is the variable that measures the average level of prices of goods and services purchased by a typical household in the country.The most important one is the Consumer Price Index.
Price index
•Is when there is a constant and widespread increase in prices over a relatively long period of time.•The annual percentage change in the price level.
Some causes of inflation are:1. MONETARY - printing money without backing it up.2. PRODUCTION COSTS - Increase in the price of inputs.3. EXCESSIVE DEMAND - Increase income in the economy but
not enough supply to meet demand
Inflation
Classification of Inflation
When the increase is between 5% and 9% annually. It is manageable with economic policy.
Silent
When the increase presents two digits (10%thereafter). It causes severe disruptions in theeconomy.
Open
Where prices are rising at abreathtaking pace (above 50%). Usually causes chaos in the economy.
Hyper-
inflation
Latent: When the possibility of skyrocketing prices is
always present in a normal growth situation
Consequences of Inflation
Loss of purchasing power•When the same amount of money now is used to purchase fewer goods
Uncertainty•The economic agents can not predict correctly as the economy becomes very volatile
Unemployment•The uncertainty deters investment and this generates unemployment
Exchange Rate
Definition:The price of a foreign currencyin terms of the local currency.
There are some mechanisms to adjust the exchange rate. These are: FLEXIBLE - free
movements in supply and demand
FIXED - established by the government
CONTROLLED - daily glide or changes in a floating band
Types of Exchange Rate
Depreciation - is the falling value of one currency against another. When it happens is a positive outcome for the country's export sector, but not for the importer.
Appreciation - in this case the positive result occurs in the import sector but affects the exporter.
Devaluation - has the same effect that the depreciation but is used to refer to consequences of economic policy in the country.
Interest Rate
It is the extra money you have (or they have) to pay for borrowing (ask)/ lending (give) a specific amount of money.
In other words, the price of money when asked or paid.
The principal benchmark rates are:TIIE and Cetes (Mexico), Libor (UK), Prime(USA)
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