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U.S. Economy How close to Adam Smith’s World? No Competition Pure Free Market <============================================ Perfect Competition Monopolistic Competition OLIGOPOLY Monopoly Market Characteristics Oligopoly Few interdependent sellers: --the top four firms in the industry make up 70%+ of total sales • difficult to enter or leave market • • • • • • • • • • • • • Car makers Steel industry Aircraft manufacturing Oil industry Oligopoly Examples Airlines Tobacco industry Beer industry Soda industry Home Improvement Music recording industry Textbook industry Wireless communications industry Aerospace industry •The most rapidly expanding market structure in USA over last 20 years Why? Because of Economies of Scale. Economies of Scale Definition: factors that cause a producer’s average cost per unit to fall as output rises Economies of Scale Example 1 car Cost of building factory (fixed cost) Cost per car produced $1 Billion $1,000,000,000 10 cars $1 Billion $100,000,000 100 cars $1 Billion $10,000,000 1000 cars $1 Billion $1,000,000 10,000 cars 100,000 cars $1 Billion $1 Billion $100,000 $10,000 Supply & Demand (Oligopoly) Individual Firm’s Demand Curve Market Demand & Supply Curves S elastic Market Price inelastic D Oligopolists face a KINKED demand curve. --Above market equilibrium, demand is elastic --Below market equilibrium, demand is inelastic D Cartels Inside the world of OPEC & DeBeers Price S D Quantity Cartels • Cartel – A group of firms acting in unison (colluding) to impact the price of their product – Illegal in USA based on Anti-Trust Laws (legal in other countries) How Cartels Affect Price •They collude to control/restrict the supply of their product •By keeping Supply low, they keep price artificially high S2 Price S D Quantity World’s most famous CARTEL Organization of the Petroleum Exporting Countries (OPEC) OPEC’S Effect on Oil Market • Controls 2/3rds of world’s oil reserves • 45% of current world oil supply • Can influence price by controlling supply of oil • uses quotas for each country Does not “set” oil prices OPEC Meeting Supply: Where is the Oil? OPEC video clips Diamonds --what should determine their value? • Diamonds were very rare until 1871 • But today, diamonds are less rare than other gemstones • So why are they so expensive? • DeBeers leads a cartel that controls the world’s diamond market Film Clip 60 Minutes segment on DeBeers Graphing Supply & Demand P2 -------- S 2 S1 D2 S1 P1 --------------D1 P1 --------------D1 • Demand is kept artificially high & inelastic through advertising • Supply is kept artificially low by DeBeers • End Result: High prices paid & lower Quantity supplied Video clip from “Fair Fight in the Marketplace” Offender: Archer Daniels Midland Co. (segment 2) 6 min. 24 sec.