hnd-经济学1-微观经济学-outcome1

Table of Contents

1。0

Introduction ............................................................................... 1

2。0 Oligopoly ........................................................................................... 1



Entry barriers ....................................................................................................... 1



Non—price competition ...................................................................................... 1

3。0 Explanation for Diagram in Oligopoly .......................................... 2

4。0 Pure Competitive Market ............................................................... 3



Lower prices ........................................................................................................ 3



Low barriers to entry ........................................................................................... 3

5。0 Explanation for Diagram in Pure Competitive Market ............... 3

6。0 Roles of Profit in Market Economy ............................................... 4



Demand for factor resources ............................................................................... 4



Market Entry ........................................................................................................ 5

7.0 The other two alternatives to profit maximization ....................... 5



Satisficing behaviour ........................................................................................... 5



Sales revenue maximization ................................................................................ 5

8.0 Influences on a Firm in the Short Run .......................................... 6

9.0 References ......................................................................................... 7

1.0 Introduction

Marco and Micro economic knowledge we had learned in this period is mainly to

discuss about some major market structures in the entire market now. And they are

oligopoly， monopoly and pure competitive market and so on. In this case， the

Virgin Mobile had entered in mobile phone market in the UK， which is an

oligopoly market。 In this market, Orange， Vodafone， BT Cellnet and One2One

are the oligopolists。

2.0 Oligopoly

When a market or industry is dominated by a small number of sellers， we usually

believe an oligopoly appears. And there are two main features of oligopoly：

 Entry barriers： It's a great block for the new company to be a long-run part

of an oligopoly market。 Usually, many smaller firms operate on the

periphery on such s market， which means these companies cannot reach the

supernormal profits or affect much to market prices and output。 Take Virgin

Mobile (VM） as an example： Before VM engaged in the mobile phone

market in the UK， there were some industrial giants conquered the market—

Orange， Vodafone， BT Cellnet and One2One， which account for a large

market share. Although VM is making profit， the money it earned is far less

than any one of these oligopolist.

 Non—price competition: As a few company be dominant to an industrial，

pricing can be no longer an effective competitiveness for those oligopolistic

firms。 Compared with pricing, after-sales service， extension of new market

and advertising seem to be more emphasized by them。 In this case, the VM

is better to promote the competitiveness in such ways -- improving the

after—sales quality， expanding into new markets , building their own brand

and so on。

1

3.0 Explanation for Diagram in Oligopoly

In the oligopolistic market， the oligopolists may react diversely to the different

price variation trend of their rivals. If one oligopolist raises the price and other

companies will not follow it to maintain the market share, however， if the

company reduce the price and other companies must follow, which is to keep

more market shares。 It can be seen in the kinked demand curve below。

Price

MC3

G

P2

P1

MC2

F

MC1

AR

Q2 Q1

MR

Output

Before the price is higher than P1, the product demand is elastic that means the

price raises and the total revenue will reduce。 But when the price is lower than

P1， the product demand is inelastic —- the price reduces and the total revenue

will also do。 Thus， the company may able to reach a stable profit-maximizing

equilibrium at the point G， so the companies in the oligopolistic market can not

change the price optionally.

2

4.0 Pure Competitive Market

In the pure competitive market structure， the company can compete with each

other perfectly. There are two common characteristics that are considered to be

“competitive” are：

 Lower prices： Generally, a perfectly competitive market exists when

every participant is a "price taker”which means the suppliers will have not

able to raise price for facing elastic demand curves， and no participant

influences the price of the product it buys or sells.

（ /wiki/Perfect_competition＃Basic_structural_characteristics ） 。

So simply raising price will make a loss of demand and total revenue。

The cross—price elasticity of demand can reflect the customers’ attitude

towards some particular goods。 The demand of substitute goods is

holding pace with the price when it has any change. Conversely， the

demand of complementary goods would decrease when the price increase.

In this condition， customers will always find the most proper goods for

themselves.

 Low barriers to entry: Compared with oligopoly, the new firms would

be easier to enter in the pure competitive market。 And the entry of new

participants will probably provide competition and ensure price is kept

low in the long run.

5.0 Explanation for Diagram in Pure Competitive Market

It is known to all that each individual firm is considered as a price taker.

Customers may not prefer to buy a product with a higher price。 Because of the

characteristic （perfect knowledge) of pure competitive market， neither buyers

nor sellers can gain an advantage and firm may sell their goods at the point

3

where they have the maximized profit.

From the short run view of a firm in a pure competitive market structure， the

explanation of the diagram is as follow：

The price in a pure competitive market structure

is decided by demand and supply， which can be seen in panel on the right. When

demand rises from D1 to D2, the equilibrium point goes from A to B

and P2 is the established price。 Because

of the price which a firm use stays at P2， marginal revenue is equal to P2 at last average revenue is equal to P2 as well. When MC=MR， profit maximization is

achieved, so the point which firms will stop producing should be C which ordinate is P2 and abscissa is Q2. According to the diagram above, when quantity is Q2, ATC is equal to P1。 So P2 subtract P1 is average profit and then multiply by Q2 can obtain total profit。

6.0 Roles of Profit in Market Economy

 Demand for factor resources

Scarce factor resources to flow where the expected rate of return or profit is

highest. In the mobile phone market， when Richard Branson started to get profit

in 2002, VM has 1,445，492 customers， which means stronger demands, more

4

labour and capital are committed。 With more scarce factor resources, VM may

able to earn more profit。 However, in a recession, the output， incomes and

investment for VM must all fall， which may cause the profit loss. Thus the

company should take action （for example cutting costs) to preserve its market

position.

 Market Entry

If an individual company gets more profit than others, it must be a signal to other

producers within a market that profitable entry may possible。 After three-year

efforts, Richard Branson made VM profiting。 When it comes， many other firms

would be attracted to enter the industry。 Thus， the competition would be

increased and new products, technologies would be also updated in a higher

speed。

7.0

The other two alternatives to profit maximization

 Satisficing behaviour

Satisficing behaviour can be the substitute to profit maximization behaviour。

This behavioural method lays stress on how decisions are taken within the firm.

When a decision is making， satisficing explains that individuals and groups

should choose the first option that is good enough to address most needs rather

all。 Based on Herbert Simon's work concerning behaviour -—“people possess

limited cognitive ability and can exercise only ‘bounded rationality’ when making

decision in complex， uncertain situations”, satisficing behaviour encourages

individuals and groups to attain a more realistic goal。

If VM set a goal that expending their customers to 2 million in a year, finally it

reaches 2.5 million。 Thus wise we can take the goal for a receivable.

 Sales revenue maximization

The goal of sales revenue maximization is to maximize the sales other than profits.

The managers decision price and strategy of products。 In this pattern of

5

management, business can grow or sustain market share, ensure survival,

discourage competitors， achieve bonuses and build the prestige of the senior

management。

For the VM, when it initially entered the mobile phone market， it is a great

approach that selling their products as many as possible with the lowest profit to

enlarge their market share。

8.0 Influences on a Firm in the Short Run

C

TC

TVC

TFC

0 Q

From the diagram above， which can be seen are total cost （TC) is the sum of

fixed （TFC) and variable costs (TFC)。In the beginning， when nothing is being

produced ，the fixed costs will be equal to the total cost。 The TC and TVC

increase concurrently with the quantity， but they are paralleled and the distance

between them is TFC which is always invariable. And total cost is an upward

trend.

6

MC

C

AC

AVC

AFC

Q

The diagram is about the short run cost curves. One time the fixed cost is excessively

used, which will lead to the progressive decrease of marginal product， meanwhile the

marginal product reduce will lead to the decrease of marginal revenue。 Leading the

reducing of the ATC when MC

increasing. Making the short-run ATC curve look like U—shaped， on the other side,

the law of diminishing returns will lead to the rise of marginal cost of production as output increases。

When AVC increasing higher than the fall in AFC one time the output increases , which the marginal cost is rising will lead to the average total cost rising

9.0 References

( http：//en。wikipedia。org/wiki/Perfect_competition#Basic_structural_characteristics ） .

7