ECON0402 - Term paper Tourist Trap Model with Downward-Sloping Demand Curve 2010 97 0203 Introduction This paper will attempt to relax the unitary demand assumption of the tourist trap model that we saw in class. The others assumptions are conserved. We will now have a linear downward-sloping demand-curve: p=G-gq I will first discuss what could be the equilibrium price and how we can deduce it. Then, I will explain the conditions that must be fulfill to sustain this equilibrium. Finally, I’ll discuss the economic interpretation of these conditions. Equilibrium price Since we now consider a downward sloping demand curve, the quantity the consumer will buy could be more than 1 and will depends on the price. Therefore, a …show more content…
The profits functions are plotted in figure 2. We also see that the sustainability of the equilibrium at the monopolistic price is positively related to the search cost. Figure 2 : Profit as a function of c, n = 2 and others parameters are the same as in the previous graph. We therefore conclude that the equilibrium at the monopolistic price is sustainable only for high enough n and c. Economic interpretation of the condition We saw that two conditions must hold to ensure the existence of single price equilibrium at the monopolistic price level: * n>n ' * c>c ' We will analyze here the economic intuition behind these two conditions. Number of firm The first one tells us that it requires a large enough number of firms to ensure a price as high as the monopolistic price in every shop. That could be contradictory since the usual intuition is that the more firms we have (that is n -> ∞ ), the more close we get to the perfect competition’s efficient price level. But here we have imperfect information represented by the search cost c. In that case, a higher number of firms implies that the probability to find a low-price shop among all the shops (1n-1) decreases. More specifically if we consider this equation: fpm>1n-1(fp '-c) We can see it as the comparison of the
Hypothetically, the ideal price that results in producer and consumer attaining the greatest level of shared benefit arises at the price where the supply and demand lines intersect. Deviations from this fact results in a
d. Calculate the price elasticity of demand in each market and discuss these in relation to the prices to be charged in each market.
equilibrium. The new company is now run as a monopoly, and this paper shall explain
In these circumstances, the cost structures are not the same as with the competitive industry and so we cannot say that the oligopolistic firm results in higher prices than if a competitive market structure were to be adopted. In fact going along the theory of the downward sloping cost curve we can come to the conclusion that it would be the other way around and consumers would
· A monopolist would not be able to increase prices if the demand for a particuar product is elastic.
In a monopolistically competitive industry, the goods sold, while not perfect substitutes, can be viewed as acceptable substitutes by most people. As a result, if Firm A raised the price of its good substantially, consumers would decrease the quantity demanded from Firm A and would move to other firms selling similar products. As a result, Firm A would sell few units at the new higher price. As the quantity a firm sells falls, so does its percentage of sales in the industry, also
Firm under perfect competition and the firm under monopoly are similar as the aim of both the seller is to maximize profit and to minimize loss. The equilibrium position followed by both the monopoly and perfect competition is MR = MC. Despite their similarities, these two forms of market organization differ from each other in respect of price-cost-output. There are many points of difference which are noted below.
In the short run the perfect competition equilibrium can be found by graphing the marginal cost (MC), average total cost (ATC) and marginal revenue (MR) curves. In perfect competition the price is equal to the average revenue, which is equal to the marginal revenue and these are all constant, giving an infinitely elastic demand curve for the firm. The demand curve is “perfectly price elastic” due to the homogeneity of the products supplied, where each supplier, as a price taker, must focus on a single price. Given this, the only choice a supplier has in the short run is how much to produce. For profit maximisation to occur marginal costs (supply curve) must equal marginal revenue (demand curve). Profit maximisation is assumed to mean the maximisation of normal economic profit (i.e. revenue that covers the
Based on eq.5, we can make several observations of the properties of Cournot competition. First, given positive market share, firms in Cournot market have the market power to price higher than their marginal costs. Second, the market power of a firm is limited by the market elasticity of demand. The more elastic demand,
* If the Incumbent opts to fight, it may benefit from the Entrant’s higher unit cost and therefore still capture the entire market though at less profit margin. Since the willingness to pay for the Incumbent is $40 more than that for the Entrant, the former can fix any price at 40 more than whichever price fixed by the Entrant. So for any price fixed by the Entrant (Pe),the Incumbent’s price will be given by,
Perfect competition: in this competition, no participant dominates the market thus; no specific seller has the power to set the prices of homogeneous goods. This therefore makes the conditions of a perfect competitive market stricter than the rest of the market structures. In this market, AT&T should be willing to sell their services in a certain price that reciprocates to their demand to maximize profits.
The following graph demonstrate the demand curve of how many items of a product or service a consumer would like to purchase at different prices. Now by having the product at a lower price, the more a consumer is likely to buy. For that same reason it can be concluded that the price is one major factor of the product demand.
b) In a monopolistic market, the price will be greater than marginal cost and thus than the
The Classical economic school of thought reflects on competition as instrument in forcing of market price to its natural level
b) In a monopolistic competition structure, although there are numerous firms, they carry different products. Due to product differentiation, each company is able to somewhat control their own pricing.