hnd经济学1微观经济学outcome1

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.

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.

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.

( http://en.wikipedia.org/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

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 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 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.

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 MCMaking 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 ) .