Market scenarios

P E R F E C T C O M P E T I T I O N , M O N O P O LY,
O L I G O P O LY

Also called perfectly

competitive market
It is an industry in which:
1.
2.
3.

PERFECT
COMPETITIO
N

4.

5.

6.

There are many suppliers (firms)

There are many buyers.
Products are standardized or
homogeneous.
There are no restrictions on entry
into the industry or leave the
market.
Established firms have no
advantage over new ones.
Sellers and buyers are well informed
about prices and take those as
given

Do you think this model is not very realistic?

Well, YOU ARE RIGHT!
Even though most of the firms have some

flexibility over their prices, this is a good way

to start analyzing firms decisions

F.i. When a firm increases its price slightly it will

certainly sell less, but the quantity sold will probably
not drop to zero.

Remember, firms dont have to pick a price,

they just decide how much to produce.

Monopoly

An industry or firm

that:
1.

2.

Produces a good or service

for which no close
substitute exists
It is protected by a barrier
that prevents other firms
from selling that good or
service.

Legal.- Public franchise, a

license or patent, firms owns
control of a resource.

Natural.- In which some

factors enable one firm to
supply the entire market at
the lowest possible cost.

Even in industries with more

that one producer, firms often

have a degree of monopoly
power.
f.i. Microsoft in the Windows
operation system today.

Oligopoly
A market structure in

which:
1.

2.

3.
4.

5.

Natural or legal barriers

prevent the entry of new
firms.
A small number of firms
compete.
Slightlydifferentiatedgoods
Firms
makedecisionsconsidering
the reactionsof
theircompetitors
Whenthere
iscollusionbecomes aCartel

Other examples:
Cigarettes, Breakfast cereals,
Chocolate

Governments intervention
WHEN DOES IT OCCUR?

Main reasons
1. Supplyofpublic goods and services

Pavedstreets, street lighting, security.

2. Correctingexternalities

Consequences or side effects of an industrial or

commercial activity that affects other parties.
3. Search fora fairer distribution of wealth

The mostvulnerablegroups.

And, wheredoes thegovernmentgetthe money?

TAXES!

Principles for establishing taxes

Neutrality
Equity
Easyto payandfor understandable reasons
Socialbenefit

Subsidies
Asum of money granted by the government to assist an
industry or business so that the price of a good or service may
remain low or competitive.
Price control
Maximun price: Theauthorityestablishes it tomake a good or
service more accessible to people. Nevertheless, it ties to
protectconsumers cause distortions in the market (artificially
stablished): Scarcity, Black market
Minimum price: Ensuresaminimum incometo producers. But,

generatesdiscrimination because some of them getbenefit

from others.

Macroeconomics
G R O S S D O M E S T I C P R O D U C T,
G R O S S N AT I O N A L P R O D U C T,
DE VE LO PM E NT A ND E C ONO MIC GR OW T H,
I N F L AT I O N A N D U N E M P L O Y M E N T

Do you remember Macroeconomics?

The part of economics concerned with large-scale

or general economic factors.

It is the study of national and global economy.
Accounts for aggregate variables such as inflation,
income, product ion and unemployment.
Results are the base for economic policy
decisions .
Focuses in two basic issues:
1. Economic Growth
2. Fluctuations in economic performance

Macro Variables
The most important ones are:
Gross National Product
(GNP)

Is the total value of

goods and services
produced by the citizens
of a country in a
given period.

Gross Domestic Product

(GDP)

Is the total value of

goods and services
produced within a country
over a given
period.
Four components:

Consumption
Government purchases and,
Expenditures
Net exports

GDP
Components of the definition

1. Total or market value means:

The prices at which each item is traded in markets
instead of the number of production.
f.i. 50 apples (production)
Each apple costs $10 then, the market value is $5
2. Final goods mean:
An item that is bought by its final user during a
specified time period and its different from the
intermediate good which is an item that is produced
by one firm, bought by another firm and used as a
component of a final good or service.

GDP
Components of the definition

f.i. A Ford SUV final good but

A Firestone tire on the SUV intermediate good.
A Dell computer final good but
An Intel Pentium chip inside intermediate good

Note: If we count the value of intermediate goods

and services produced to the value of final
goods and services, we would count the same
thing many times. So, avoid double counting.
Also, some items that people buy are neither
final nor intermediate goods.

Second hand goods: used cars or existing homes

GDP
Components of the definition

3. Produced within a country

f.i. Toyota, a Japanese firm, produces automobiles in

Mexico and the value of this production is part of the
Mexican GDP not part of Japans

4. In a given period of time:

Normally either a quarter of a year

Important: The GDP also measures the total

income of a country and its total expenditure
because it shows the direct link between
productivity and living standards.

Gross Domestic Product (GDP)

GDP does not include:
Nonmarket transactions (illegal),
Intermediates to produce other goods
Industries outside the country
Formula:
GDP = Consumption + Private investments + Government
Expenses + Exports - Imports

Two basic issues:

#1 Economic Growth
GDPs behavior is observed over time to:
Determine if there are advances or setbacks in the
countrys activity.
Then, economic growth is defined when we find that real

GDP (GDPR) in a year is greater than the previous one.

Also, economic growth means a expansion of the
economys production possibilities (PPF)
So there:
Economic Growth Rate = current GDPR - past GDPR
past GDPR

X 100

What is the GDPR?

Supposed this:
In 2010 a GDP of $13,000 billion but, a year before
In 2009 it was $12,000 billion
We know now that GDP in 2010 was greaterbut why?
We produced more goods and services
We paid higher prices for our goods and services
So, the Real gross domestic product represents the

change in production; is the value of final goods and

services produced in a given year when valuated at
constant prices.

Then by comparing the value of g&s at constant prices, we can

measure the change in the quantity of production.

Two basic issues:

#1 Economic Growth
So, economic growth

measurement is
carried out in order
to:

Make comparisons of
economic welfare
Make comparisons
between countries and,
Behavioral forecasting
of the economic cycle

Economic Growth vs. Economic Development

It is not the same to refer growth as development because the last
one refers to a larger group of variables that have to be taken into
consideration.
Among the variables that are ignored in the calculation of growth but
not economic development are:

Health and life expectancy

Educational Level
Environmental quality
Political freedom
Social Justice
Redistribution of income

Poverty in Mexico

Short activity: Debate and

analyze

Economic cycle
P OV E RT Y & U N E M P LOY M E N T

What is the economyc cycle?

We consider the economic cycle as the set of

fluctuations (movements) of GDPR over time.

We can identify four elements:
1.
2.

3.
4.

Contraction: growth slowdown of the GDPR

Expansion: accelerate the pace of growth of the
RGDP
Peak (top): highest point reached in the cycle
Depression (valley): lowest point reached in the
cycle

MONEY

How can
countries
promote
growth?
Searching for
these elements:
i.

Skilled labor
and capital

ii. Investment

in research
and
development
iii. Efficient use

of resources

Poverty
Relative

Absolute

When we compare
living conditions within
the country.
When you can not
Causes
access the minimum
conditions for survival.
Lack of
Resourcing

Political
instability

Culture of
investment/savings

Educational
Level

Spiral of poverty
There are main variables involved in the
worsening of living conditions of society.
The variables are:
Nutrition
Health
Education and,
Income

Unemployment
It is considered unemployed anyone over 14

who wants to work and can not find a job.

The unemployment rate is calculated using
the economically active population (EAP)

Unemployment rate = # of unemployed agents

100
EAP

Types of Unemployment
1. FRICTIONAL - Resulting from the normal

rotation of jobs (daily creation and

destruction).
2. STRUCTURAL - Resulting from changes in
technology or skills of workers who are
forced to retire from their job.
3. CYCLICAL - Resulting from the fluctuation
(movement) of the economy (increases
during recession, decreases during the
expansion).

Prices and currencies

P R I C E I N D E X , I N F L AT IO N A N D
E XC H A N G E R ATE S

Price index
Is the measure of the average of the prices paid by
urban consumers for a fixed basket of goods and
services.
Also,
Is the variable that measures the average level of
prices of goods and services purchased by a typical
household in the country.
The most important one is the Consumer Price Index.

Inflation
Is when there is a constant and widespread increase in prices

over a relatively long period of time.

The annual percentage change in the price level.
Some causes of inflation are:
1. MONETARY - printing money without backing it up.
2. PRODUCTION COSTS - Increase in the price of inputs.
3. EXCESSIVE DEMAND - Increase income in the economy but
not enough supply to meet demand

Classification of Inflation

Latent: When the possibility of skyrocketing prices

is
always present in a normal growth situation

Consequences of Inflation

Exchange Rate
Definition:
The price of a foreign currency
in terms of the local currency.
There are some mechanisms

to adjust the exchange rate.

These are:
FLEXIBLE - free movements
in supply and demand
FIXED - established by the
government
CONTROLLED - daily glide
or changes in a floating
band

Types of Exchange Rate

Depreciation - is the falling

value of one currency against
another. When it happens is a
positive outcome for the
country's export sector, but
not for the importer.

Appreciation - in this case the

positive result occurs in the
import sector but affects the
exporter.

Devaluation - has the same

effect that the depreciation
but is used to refer to
consequences of economic
policy in the country.

Interest Rate
It is the extra money you
have (or they have) to pay
for borrowing (ask)/ lending
(give) a specific amount of
money.
In other words, the price of
money when asked or paid.
The principal benchmark
rates are:
TIIE and Cetes (Mexico),
Libor (UK), Prime(USA)