Exercise 2 - 2 Economic Games

Economic Games

http://games.t45ol.com/play/6132/diner-city.html

The economics game Diner City demonstrated microeconomics facts. Running a business in a mixed economy has many challenges for the entrepreneur. Decisions on pricing and production are influenced by supply, demand and scarcity. The turn based game gave the player decisions on to how best to spend money on a restaraunt. Initial upgrades are inexpensive and raise the marginal revenues sharply until diminishing returns. Further upgrades are expensive with a small raise in marginal revenue.

Factors including buying additional revenue generating enterprises such as the newstand or ice cream store gave a good advantage in the early parts of the game but were unavailable by level three. It was crucial to have fast service as not to lose customers balanced with the right seating capacity.

Upgrades to the business would increase capacity and average revenue per customer, careful monitoring of money and upgrades were needed to ensure competiveness. The security system was a vital expenditure as I was robbed every time I did not buy it! Having the food delivery upgrade early pays off.

The fourth level requires expansion into another location to maximize revenue and out sell your opponent. Early expansion gave a higher percentage of market share and increased chances of winning. Each turn requires the player to weigh different options more is not always better neither is faster always better the right balance or equilibrium is the most profitable.

Exercise 9 - 2: Comparing Market Structures

Four Market Structures
	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number of Firms	Very Many	Many / Several	Few	One
Freedom of Entry	Unrestricted	Unrestricted	Restricted	Restricted or Completely Blocked
Nature of Product	Homogeneous	Differentiated	Undifferentiated or Differentiated	Unique
Implications of Demand Curve	Horizontal: Firm is a price taker	Downward Sloping but Relatively Elastic	Downward Sloping. Kinked Shape. Relatively Inelastic. (Shape depends on rivals reactions)	Downward Sloping More Inelastic Than Oligopoly. Firm Has Considerable Control Over Price.
Average Size of Firms	Small and Large (Economies of scale will encourage growth)	Small and Large	Large	Small or Large
Possible Consumer Demand	Elastic	Elastic, Firms face Individual Demand curves	Consumer demands factors include  advertising and pricing from rival firms	Consumers are limited to one choice
Profit Making Possibility	Normal Profits	Normal Profits	Normal and Economic Profit(Depends on reactions of price setting by rivals)	Economies of Scale. Normal and Economic Profits in short and Long Run
Government Intervention	Price Floors and Ceilings	Government May Limit Entry	Highly Unregulated Resulting in Cartels	Anti-Monopoly Legislation. Profits Taxes. Sales Taxes. Price Setting. Nationalization
Efficiency	Productively (P=Min AC) and Allocatively Efficient (P= MC)	Productively and Allocatively Inefficient	Productively and Allocatively Inefficient. Technological Development May Push Costs Down	Productively and Allocatively Inefficient
Examples	Corn, Onions, Broccoli	Gas Stations, Convenience Stores, Night Clubs	Cable, Phone and Internet Providers	Public Transit, Utilities

Perfect Competition Graph Example figure 9.2A This is representation is of a typical firm in a Perfectly Competetive Market. Price is set where Marginal Costs(MC) intersect the perfectly elastic demand line which is also the Average Revenue(AR) and Marginal Revenue(MR). Average Profit(AP) is the difference between Average Costs(AC) and Price(P1). Average Profit times Quantity(Q1) is the Total Profit :




Figure 9.2A

 

Monopolistically Competitive Graph Example Figure 9.2B. This repesentation of a typical Monopolistically Competitve firm has a elastic demand line(D1). Total Revenue is Price(P1) times Quantity(Q1). Total Reveue minus Total Costs(Q1 times C1) will give Economic Profit amount. Price is set where Marginal Revenue(MR) intersects Marginal Costs :



Figure 9.2B



Oligopoly Graph Example Figure 9.2C The following is example of a typical firm in a Oligopoly Market. The Kink in the demand curve has both Elastic and Inelastic sections. The profit maximizing output is (Q1). Price and Quantity equilibrium will remain the same even if Marginal Costs increase as shown in the difference between (MC1) and (MC2):



Figure 9.2C

 Monopoly Graph Example Figure 9.2D. The average firm of in a Monopoly represented by the following figure. the Demand Line is the same as Average Revenue, the break even points are where Average Revenue(AR) intersects Average Costs(AC) The profit maximizing price is where Marginal Revenue (MR) and Marginal Costs (MC) intersect and correspond with the quantity price of the Average Revenue line(AR):



Figure 9.2D



Exercise 8 - 1 Game Theory

The Concepts of Game Theory:

Mutual Interdependence, price setting and different forms of collusion are common among firms in a Oligopoly Market.
Game theory is related to the economics example of the "Prisoners Dillema". It explores collusion and competition among competetive forces using a payoff matrix to outline variable profits received against the decision to cheat or not to cheat.

A Payoff Matrix is used to graphically compare the pros and cons of cheating or being honest when pricing their products. Firms may choose to cooperate with their rival and if cooperation is reciprocated  each firm will share the combined maximum of profits. Increased profits are temptations to cheat and also result in punishing the honest firm. Combined cheating offers the lowest possible result.

Game Theory measures behaiviour and interdependence of firms. John Nash discovered and did initial research in this economic concept. Nash Equilibrium is used in Game Theory to measure the anticipated actions of game participants. (Sayre,Morris)

Game Theory is evident in our local marketplace in the competition among phone, cable and internet providers. The two major suppliers of fully bundled services in Calgary are Shaw and Telus. These companies periodicly lower prices, aggressively advertise and offer incentives to change consumers over to the competition. The high cost of exchanging back and forth a small percentage of the total market is unproductive and wasteful.

A Cartel is a form of Collusive Oligopoly where the member/suppliers of the cartel agree upon a set price and influence the market by controlling the output of product. A cartel is only successful if all the members stay honest and do not sell below the agreed upon price. A cooperative cartel acts like a large monopoly.

Links:
http://www.web-books.com/eLibrary/ON/B0/B63/056MB63.html

Exercise 7 - 1 Defining Monopolostic Competition

Defining Monopolistic Competition

Monopolistic Competition, one of the 4 basic market structures, has 4 major characteristics:

• There are many small firms;
• Each firm sells the same product, although products are slightly different;
• Firms are free to enter or exit the market without any significant barriers;
• Buyers have knowledge of alternative prices, product differences, brand names and techniques used in the industry.

Firms differentiate themselves from each other with their products and/or services:

• Physical differences of products can have multiple forms which may include materials, flavour or presentation;
• Perceived differences where identical products have only a small change which may be something small as different packaging;
• Support services for products and services differentiate firms by elements which may include increased level of service or self serve options.

Monopolistic Companies

Size:	Small Company	Medium Company	Large Company
Features:
Differentiated products	Opa! - Greek Fastfood	Earls - Evolving menu	Starbucks - Signature tasting espresso
Control over price	Booster Juice - offers a more advanced product and charges for it. i.e. They grow grass for drinks in-store.	Tim Hortons -  Guaranteed fresh coffee more affordable than Starbucks	Walmart - Economies of scale give retail giant enormous purchasing power
Mass advertising	Red Lobster- Television	Little Caesars - Television, Print and Public media	Mcdonalds - multimedia marketing
Brand name goods	Spolumbos - Brand used on menus and supermarket features, sponsorship	Izod -	Adidas

Source: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic%20competition