Exercise 9-2: Compering Market Structures

Markets Comparison Table

Perfect Competition Graph

 

 

 

 

 

 

Monopolistic Competition Graph

 

 

 

 

 

Monopoly Graph

 

Ologopoly Graph

 

 

Exercise 8-1: Defining Oligopoly and Game Theory

Oligopoly is a type of market where only few large firms can exist with are involved in non price competition. New firms rarely enter the market. Each firm has significant control over price. Monopolistic market can only have one firm that has control over price, product that is "unique" and other firms cannot enter this market. In perfect competition there are many firms that do not have control over price, have identical product and new firms can easily enter the market. In monopolistic competition market there are many firms with differentiated product, they have low level of control over price and it is easy for new firms to enter the market.
As a customer I would prefer monopolistic competition market because they have differentiated products and low control over price. The knowledge that I have now doesn't change much in my purchasing habits. I have preferences that I would not change. But the fact, that monopolies have price discrimination, will stop me next time when I will look at new TV sets.
Game theory explains how rivals seek for a best solution for the situation considering reactions of a rival. They can come to an agreement on how to divide the market and both have same benefits or they can cheat on each other making more that competitor for a while. This can go back and forth but if they stick to an agreement - they both make profits.
Cartel actions occur when few oligopoly firms agree to divide the market ans stick to the price. But they will only work to the advantage of their members if there will be no cheating. There are other forms of collusive actions: dividing market geographically, by existing client lists or controlling output.

Defining Monopolistic Competition

Each monopolistic company has to differentiate its products from competition in order to win customers. But there are more to monopolistic competition that product differentiation.

Competing as Starbucks

I would not call Starbucks's market a perfect competition market. Only because some of the business decisions "simplified" the experience - they do not change the market. It is still a market with huge companies or franchises where it is not simple to get into, every business is different and trying to differentiate their product from others. Starbucks is just trying to be effective by using new technologies even if it is changing the whole experience. It is good to stick to traditions but as a customer who pays $4-5 for a cup of coffee I would like service to be on the same level.(in our speedy lives we do not always ready to "stop and smell the roses")

Another problem - store closings. Obviously, if store doesn't make profits - it has to be shut down because main reason for opening it was to make profits. You cannot predict how economy will behave in the future. In times of recession, when people loose jobs, it is hard for any business to stay profitable and, I think, it was the main reason for those closings.

Starbucks doesn't charge for coffee - it charges for experience. You get a small coffee shop feeling when you come in, you can have a chat with your friends there. This is what you pay for. It is an experience that you cannot find in many stores. If they lower their prices - demand would increase and stores would not be able to handle increased amount of customers. Quality of service will suffer and they would loose clients who pays high prices but enjoys the experience.

Exercise 5-5: Long Run Costs and Economies of Scale

For this exercise I have to describe a business I might create.

If I was able to borrow $1,000,000.00 I would open a daycare and a party place for kids. This is a business I am most familiar with and would be able to work with.
For this kind of business I would need around 4-5 thousand sq. feet facility to accommodate big playground with slides, car racing, ball pit, games room. It will also have a kitchen, little bistro area for parents witch would work as a dining room for a daycare.
There will be two groups of children in a daycare and a party place on weekends. It would target market of parents that have kids ages 0-6. Demand for such a place is huge because in Calgary there is a huge gap on a market for party places and daycares.
Major costs will be: long run - a lease for the facility(fixed cost), loan payments for borrowed money(fixed cost), short run - salaries payable, cost of food, toys and other supplies, utility payments, maintenance payments, taxes.

I found a similar business that operates in Toronto, ON. They have the concept of combining daycare and a party place. The facility operates 7 days a week. They target market of kids ages 1-6. It's hard to determine their costs because it's a private facility but I can assume that costs for my imaginary business would be almost the same.
http://www.playlandltd.com/eng-partyplace/index.html

Exercise 4-3: Income and Cross Elasticity

North America runs on oil, coal, and natural gas. Although a larger share of our needs will be met through increased use of hydro-electricity, wind, solar, nuclear, and other forms of renewable and alternative energy, fossil fuels will continue to play an important role in our nation’s energy mix in the foreseeable future.
Securing that future means finding a secure supply. And one growing solution is the natural bitumen deposits that make up Canada’s oil sands.
The sheer size of the Canadian oil sands, located primarily in the province of Alberta, has the potential to significantly enhance North America’s energy security by providing a safe and reliable supply of crude oil and petroleum products. Politically stable, Canada has a reputation for technical and contractual reliability as well as high environmental standards. Canada offers abundant supplies of reliable, affordable energy and the requisite delivery and distribution infrastructure.
In today's world there is no substitude for gas and oil in the amounts required. Demand for this this products is inelastic and growing as population numbers rise.

Sourse: http://www.capp.ca/canadaIndustry/oilSands/Energy-Economy/energy/Pages/default.aspx

Exercise 5-3: Law of Diminishing Returns

"The Diminishing Returns to Tobacco legislation" article made think about how much governments do to make people quit smoking. At first, it worked - a lot of smokers gave up. (They where ready for it) But then the numbers started to slip down no matter how much restrictions where introduced or how much they will pay for their habit. I agree with the author that law of diminishing returns was working in this case.
To make more people quit smoking governments have change some other variable or use other methods instead of increasing taxes. In my opinion, who wanted to quit - they quit already but today's priority has to be teenagers who will start smoking. There are a lot of restrictions but not enough for them not to start.
Another aspect of this - taxes. Governments use them for lots of different things. What if everyone quits, no tobacco sales?(if this was possible) And tobacco taxes is a big piece of pie...