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PRICES AND MARKETS Topic 1 : Markets Economics is concerned with the efficient use of limited productive resources for

the purposes of attaining the maximum satisfaction of our material wants. Jackson, page 3 Macroeconomics deals with this problem at the aggregate level. Microeconomics (this course) deals with the problem at the level of individual units - such as consumers, firms, owners of resources. 1-1

Why is the study of economics important? to provide a basic understanding of the economic aspects of societys current problems and issues and the economic consequences of policies to place business managers in a better position to formulate strategies to provide individuals with knowledge to assist in a range of personal/financial decisions

Jackson pages 4-5 1-2

Positive Economics: deals with facts and theories Normative Economics: involves value judgements and relates to policy 1-3

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MARKETS: an overview Definition of a market using the concepts of demand and supply substitutability. Classification of market structure using the concepts of concentration, product differentiation and barriers to entry. Market conduct and its relationship to market structure. 1-overview

Users of the Market Concept firms: to identify their competition competition regulators: eg. Australian Competition and Consumer Commission, Competition Commission of Singapore, Competition Policy Advisory Group (Hong Kong), Federal Trade Commission (USA), 1-4 The Australian Competition and Consumer Commission (ACCC) and Mergers The ACCC needs to assess whether a merger would have the effect, or be likely to have the effect, of substantially lessening competition.... In analysing the likely effect of a merger or acquisition, the Commission hasa five stage evaluation process The first step is to define the relevant market, in its product, functional, geographic and time dimensions.. Market definition is an integral part of competition analysis. It identifies the sellers and buyers who effectively constrain the price and output decisions of the merged firm. It identifies the relevant area of competition.
ACCC Merger Guidelines, Sections 5.1, 5.25, 5.26 and 5.35

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Market Definition A market includes all sellers who are in, or potentially in, competition (that is, selling closely substitutable products) selling to a common group of buyers. Two main elements of this definition: demand substitutability supply substitutability 1-6

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Elements of Demand Substitutability The Product Level The firms must be selling products which are closely substitutable in consumers eyes - that is, products with a high cross elasticity of demand. The Geographic Dimension The firms must be selling to a common group of buyers international, national, state, local? The Functional Level Is the market at the manufacturing, wholesale or retail level?

Elements of Supply Substitutability current suppliers Firms currently supplying products that are considered to be close substitutes for each other, and so part of the same market. potential suppliers Firms that have the ability to quickly and easily move into supplying these products, if given the incentive.

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Market Structure the competitive environment in the market Characteristics of Market Structure Concentration The number and size distribution of firms in a market (measured by market shares or concentration ratio) Product Differentiation Physical (real) or subjective (perceived or imagined) differences in consumers minds between rival firms products Barriers to Entry The extent to which it is difficult for new firms to enter a market and compete with existing firms (eg. patent rights, economies of scale)

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Concentration: Size Distribution of Firms


40 35

% Share of Market Sales

30 25 20 15 10 5 0 1 2 3 4 5 6 7 8

Firms

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Unit Cost $

Barriers to Entry: Economies of Scale

CN

CE O QN QE

Unit Cost Output

QE - CE: output and unit cost for existing firms in the market QN - CN: output and unit cost for new firm trying to enter the market 1-10

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Market Structure
Selling side of Market 1. Pure/Perfect Competition Large number of sellers Homogeneous product Low barriers to entry

Pure Perfect

Perfect knowledge Perfect mobility of factors of production 2. Monopolistic Competition Large number of sellers Differentiated products Low barriers to entry Oligopoly Few sellers High barriers to entry Differentiated or homogeneous products Monopoly Single seller High barriers to entry

3.

4.

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Basic Conditions

Market Structure

Market Conduct

Market Performance

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Market Conduct firms policies in regard to their operation in the market For example: price setting product range co-operation with rivals advertising research, innovation legal tactics 1-13

Prices and Markets: lecture overheads vm081

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