Comparing Market Structures

The below table compares the four market structures: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly.

Perfect Competition - The below graph depicts the demand curve for a single firm producing a small part of the supply. If the market price of their product applies to all buyers and sellers, they can sell any quantity they want at this price.

Monopolistic Competition - The below graph shows a profitable, monopolistically competitive firm. This shows an elastic, downward-sloping demand curve. The demand depends on the amount of competition to the firm. This curve is elastic because it is easy for customers to leave for the firm's competitors.

Oligopoly - The below graph illustrates a firm that belongs to an industry made up of only a few large firms. The demand curve is downward-sloping and inelastic below the kink as this is when the other firms price match.

Monopoly - The below graph shows a monopoly. The demand curve is not constant as the output is increased.

Oligopoly and Game Theory

An oligopoly market occurs when the market is comprised of a few large companies that dominate an entire industry. Occasionally, a new company makes an appearance in this industry, but entry is very difficult. This differs from a perfect competition market in that they have price control, although it is limited somewhat by consumer demand. It differs from monopolistic competition in that these companies are large firms, and in monopolistic competition the firms are small. Knowing the differences between the markets is very helpful to me as a consumer. It will help me make smart decisions in my purchases, and to know in what industries I will have more choices and price options.

The main ideas behind game theory is that individuals are out for their own personal advantage, and so they all look out to further their own interests in the market. This theory developed through a theory by watching poker games, and how each player looks out for the best moves for themselves only. This was then applied to how individuals lived their lives and make decisions in the market. It looks at how people seek out the best possible action, taking into consideration how their rivals will react. The payoff matrix is a set of decisions or strategy that each individual can make and it’s various outcomes/following “moves”. Once a decision is made, it produces a specific outcome, but if that decision is altered, the outcome is also altered, and the next “move” is affected as well.

Collusive actions are when suppliers agree to set a price of a product or the amount of that product that each will produce. Cartel actions exist when there is a formal cooperation between firms acting in unison.

Defining Monopolistic Competition

Monopolistic competition occurs when you have smaller firms that provide similar products with slight differences competing against one another. They place emphasis on this differentiation in order to draw customers, and to be able to have control over pricing in their market as well.

Monopolistic Competitive Companies

Size:	Small Company	Medium Company	Large Company
Features:
Differentiated products	Big Rock Beer	Kobo	Apple
Control over price	Crave Cupcakes	Air Canada	Starbucks
Mass advertising	Atlas Pizza	Home Hardware	Nike
Brand name goods	Calgary Stampede	Oakley	Toyota

Competing as Starbucks

A perfect competition market is defined as a market where the producer and the consumer have no control over the price of the product is bought and sold for. Starbucks is considered a part of the perfect competition market because the price has been determined by the demand of the collective Starbucks customers – because of the popularity of the brand, prices have increased and are being charged at all Starbucks locations. The individual location and customer have no input on what that price is.

Some main reasons for Starbucks to realign their business practices are is that because they have been so interested in growth and improving efficiency, they have lost some of the characteristics that made them stand out in the first place. By introducing new technologies into their stores, they have increased their productivity and efficiency, but they lost some of the character of grinding the beans, and making their drinks theatrically for the customers, some of the things that made them stand out in the first place. This could be the same reason to close a number of stores. To focus on providing the best possible service to the customers that helped them build into the empire they are to begin with. (Retrieved from http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html September 1, 2012).

Costs and profits have made a big impact on these decisions. The stores that Starbucks are talking about closing are all stores that are not turning a profit and aren’t expected to. Some short-run costs involved with shutting some stores down would be the takedown of materials at the store levels, and the marketing costs of issuing statements regarding the closures and trying to promote Starbucks brand in the midst of negative media regarding closing stores and being responsible for lost jobs. Some long-run costs would be the payout of severance costs and long-term lease obligations that are ended early.

I think that Starbucks coffee is too expensive, but it doesn’t stop me from buying their products. However, for me, Starbucks is a treat – it’s not something that I could legitimize buying every day because then the cost adds up and I look at the opportunity cost of things that I could be spending that money on instead. They are able to charge the prices that they do because they sell a quality product that their customers want, and their customers are paying these prices every day for their products. Because the demand exists for the product, and the price is not impacting that demand, they can continue to charge it. If they lowered their prices, I think that demand would increase because more people could afford their product, or at least could afford to buy it more often. I know for myself, I would visit Starbucks more often if they were cheaper. If there was a increase in demand, Starbucks would have to increase their supply to meet that demand. The graph below shows an increase in demand and supply.

(Retrieved from http://www.econport.org/content/handbook/Equilibrium/shifts-graph.html  September 1, 2012).

Long Run Cost and Economies of Scale

These days, people are very interested in clean living alternatives in everyday life. This extends to the items that people use on their babies as well. More and more people are turning to organic baby food, toys and bottles that are BPA free, and cloth diapers. A potential business that I would be interested in creating is a web-based cloth diaper company that sells cloth diapers, organic, gentle laundry detergent, and accessories.

This would be a small family-run company based out of our home. This product would be marketed towards new parents looking for healthy alternatives to disposable diapers. The market size would start small. I would use social media such as Facebook and Twitter to begin getting the word out, meaning that the initial customers would be friends and friends of friends who have children or are looking for gifts for others who have. Short-run costs would be the initial investment in a variety of products that we would carry, such as different brands and styles of cloth diapers ready to be shipped out when orders are placed online.

Long-run costs that would be involved as the business grows would be bringing in more products as more inventory on hand would be required to keep up with increasing orders, more accessories to complement the diapers, and time spent researching the market to keep up with new brands that are popular. A fixed cost example would be website registration fees, and PayPal fees to ensure that customer have a secure payment option.

One example of a similar business is www.puremodernbaby.ca.  When I searched for “Alberta cloth diapers” in Google, this was the first company that came up in my search, which shows good marketing on their part. They have a section that educates the customer on types of diapers available, which is very handy for new users. They also have a gift registry section, which is great for expectant parents to register to receive the diapers as gifts, since the start-up costs for new families can be expensive. The website is very easy to navigate and user-friendly. They also offer PayPal as a payment option, which many customers will look for to ensure their credit card information is secure. They have accounts on Facebook and Twitter. One thing that they could add to improve on their customer service would be to add videos demonstrating how to use the diapers to illustrate ease of use for people who are unsure about making the switch to cloth diapers.

Pure Modern Baby (2010). Retrieved on August 13, 2012, from: www.puremodernbaby.ca

Elasticity of Demand in the Tourism Industry

The tourism industry in Canada is on the rise, albeit a slow a steady rise. The Canada Business Journal shows that the amount Canadians are spending on tourism is up slightly - "the ninth consecutive quarterly increase" (2010). This increase is coming from more Canadians spending money to vacation at home. In my opinion, this makes sense. The economy has been improving since the recession a few  years ago, but many people may still be paying off debt that was incurred during that time, or simply spending more conservatively with the memory of tougher times still fresh in their minds. It makes sense that as Canadians begin to spend money on the luxury of vacations, they would choose the more economical option of staying close to home.

This has led to a boost in the tourism industry, but not in every sector. "These increases were offset by a 0.2 per cent decline in spending on food and beverage services and a 0.3 per cent decline in other tourism commodities, such as recreation and entertainment" (2010). Canadians spend less than international travellers in these areas. This year, there was a cut in government funding to the Canadian Tourism Commission, meaning that they had to decrease the amount of marketing in international areas. This comes at the same time as the United Staes has increased their own marketing campaign (2012). So we are seeing a slow and steady rise in the industry, but not as big a rise as we would see if more international travellers were visiting Canada.

I think that the tourism industry has a high degree of elasticity. As Canadians see a rise in income, they will spend more on luxuries, including travel. Tourism is an industry that is income elastic. The more people make, the more they will spend on travel.


Canadian Business Journal. (2010, January). Tourism spending on the rise. Retrieved on August 7, 2012 from:
http://www.cbj.ca/business_news/canadian_business_news/tourism_spending_on_the_rise.html

Yelaja, Prithi. (2012, July 26). New tourism ad makes U.S. look like Canada. Retrieved on August 7, 2012 from: http://www.cbc.ca/news/world/story/2012/07/25/us-tourism-ad.html

Law of Diminishing Returns

During what economists call a short run, not all inputs can be increased at the same time with regards to the production  process. At least one input in the production process is fixed. Let's say in this type of situation you decide to add more of the variable input to the process. At first, you would see a bigger jump in the total product produced as a result of this. However, as more of this input was added, eventually you would see a decline in the marginal product.

This is illustrated in Pierre Lemiuex's article on tobacco legislation (2001). Lemieux discusses the "diminishing returns to government intervention" (2001). Some points that the article makes that have merit is that the there have been strides made in tobacco legislation. At the time of this article, there had been an increase in the number of public places that no longer allowed smoking. Lemieux also mentions that most "smokers who were the most easily persuaded have already quit" (2001).

However, this last point, while proving his point that these campaigns had been working, also lessened the debate for me. Increasing the cost and tax on cigarettes had already deterred smokers who could no longer afford to spend so much on them, or at least could no longer validate spending more on them at the higher prices. The government warning labels had worked as well. The assumption, then, is that the people who remain smoking are not deterred by either of these factors. Increasing the price even more, or adding even more government warning labels still will not deter the people "who value smoking more" (2001). Therefore, would it not be a waste of government money and time to continue in this vein?

Lemieux indicates that banning smoking in public places "should not be discounted" (2001) in being successful while lessening their diminishing returns. If smokers continue  to quit smoking, the demand for cigarettes would decrease, causing a surplus. Since the tobacco companies would not be able to lower the price, due to the price floor set in place by the government, they would be forced instead to slow production, which would also decrease supply.

If "sin taxes" were raised on cigarettes, this would also decrease the demand, since fewer people would be buying them at the higher price. Government tax revenue would rise because the demand on cigarettes is inelastic.

While it's good to see that these government actions have had some effect and there has been a decline in smokers, in my opinion at there are some people who will always smoke, regardless of the price or the warning labels. Lemieux briefly mentions prohibition as well, which would just result in cigarettes being smuggled in and the government losing out on the sin taxes. As long as the government gains more in sin taxes than it spends on anti-smoking campaigns, there is no harm in continuing.

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

Price Elasticity and Revenue

When the quantity that is demanded of a particular product changes as a result of a change in price, that is price elasticity. Typically this can be seen in luxury items, or items where there are plenty of substitues readily available. I found a great example of this in the June 2011 article about the new Fiat being sold at extremely affordable pricing. McNaughton (2011) talks about how the Fiat is being sold to a wide variety of people, in large part due to how affordable it is. Sales are high as a result of the low price, the assumption being that if the price were to be raised, sales would drop.

I have drawn up a graph based on fictional numbers to illustrate this theory.

McNaughton, D. (2011, Jun 3). Drivers get droptop at bargain; Open-air model brings back memories of original 500c. Times - Colonist, p E.7. Retrieved on July 25, 2012, from:
http://search.proquest.com.libresources1.sait.ab.ca/canadiannews/docview/871134979/1383B49AF151A305DD7/11?accountid=13652

Graphing Changes to Demand

So many different factors can affect the demand of a product over time. Sometimes this can occur simply due to a change in taste - we will not always continue to like the same products indefinitely. We try different brands or styles of a product and may switch to buying something different. For most normal products, income may play into the decision of what we purchase. Some brands are more expensive than others, so when we are making more money, we often will opt to buy the more expensive brand. If our income decreases, we switch to a brand that is less expensive to save money and buy those inferior products.

Prices can affect these decisions as well. As the price of a product rises, we may switch to a substitute product that is less expensive. Another determinant of demand is complementary products, which are products that are purchased because they complement another purchase. For example, when I purchased my iPad, I then bought the screen protector, the case, and some other accessories which complemented that first purchase. Our expectations of the future also plays a role at times. For example, if I hear that the price of fuel is expected to rise, I will gas up my car, even if I wasn't planning to or "needing" to for a few days more.

These demand changes can be illustrated on a graph. Please see the below example that I found on this website (2006).

Experimental Economics Centrer.  (2006). Using a Graph. Retreived July 18, 2012, from: http://www.econport.org/content/handbook/Demand/Graph.html

Games About the Economy and Marketplace

We've been assigned to play an online game to illustrate demand and supply. I chose to play Diner City. In this game, the player selects a business to run. Each day, the player is given options on what to purchase or upgrade with the revenue earned from the previous day in order to bring in more business and increase revenue. I felt that this tied in with my earlier post on production possibilities in that there is a scarcity of resources. If I spent money on more staff, I gave up the opportunity to spend that money on changing the menu or bringing in entertainment for the patrons. I had to gage how well my restaurant was doing as compared to the competition, and observe what they were doing differently, in order to make an informed decision about my next expenditure. It also showed me that when I upgraded my restaurant, I also increased demand in that more customers were coming through, so I then had to increase the number of seats, as well as the number of staff. Staff became more expensive, as did the cost of cleaning. It was a great example of how costs go up as revnue increases. Bonus - the game is fun to play!

Production Possibilities and Scarcity

The choices that we make have costs - this is true on both a large scale when we are looking at society's choices that affect many people, and also on an individual level. Since a country does not have unlimited resources available, society is faced with making decisions about what should be produced that will have the best impact on the economy. These choices have an opportunity cost, meaning that we have to examine not only the actual cost of the goods or services that we have decided to produce, but also the value of the alternatives that have been given up to produce these.

Scarcity can be illustrated on a production possibilities graph. This type of graph assists in showing two possibilities for production in a specific time period. It will depict that when more is produced of one item, less can be produced of the other.

This type of scarcity can also be seen on an individual level. For example, in order to make the decision to return to school, I had to assess the costs that would affect other areas of my life. Because I work full-time, I only have a certain amount of time available for other areas of my life. I have to a lot a certain amount of time to housework, gardening, errands, etc. Returning to school means that I have less time to accomplish those things, as well as less time for hobbies. I had to weigh the costs to determine what was most important to me in order to make the decision to return to school. We are all faced with these decisions, in some form or another. By analysing production possibilities and scarcity, we are able to make educated choices.