Conditions for perfect competition. Looking at the airline industry
Discusión y preguntas de este video
- In pretty much all of the videos so far we've
- been assuming an economic ideal, and that economic ideal
- is perfect competition.
- And perfect competition is exactly what
- you think it is, competition.
- But what I want to do in this video
- is think about it in a little bit more exact terms,
- in terms of what are the ground rules we need
- to have to really have this ideal perfect competition.
- It's important to realize that there's very few markets that
- are truly perfectly competitive.
- And those that are are very good for consumers,
- but there are that get very close to being
- perfectly competitive.
- And if we have time, we will discuss those in this video.
- Now, to be perfectly competitive,
- you have to have many competitors.
- So one of the first stipulations is many players.
- And they need to be competing for the kind of the same buyer
- and kind of offering the same thing.
- And so they need to have identical products.
- Remember, we're talking about an economic ideal here.
- There's very few markets where the product is absolutely
- identical or the service is absolutely identical,
- but we're talking about an economic ideal over here.
- The next condition you need is no barriers to entry.
- So, if at any given moment it looks
- attractive for other people to go into that market,
- other people will go into that market
- and there's nothing that's really going to stop them.
- If the firms that are already in the market
- are making an economic profit that means that it's good.
- It's a good option for people to do.
- You can do better in this market than your opportunity costs,
- and so people will enter into that market.
- And in order for this market to be perfectly competitive,
- we can't have any barriers, nothing stopping those people.
- On top of that, there can be no advantage
- for established firms.
- No advantage for existing firms.
- So once someone jumps into the fray
- and, assuming that they are somewhat competent,
- they are going to be able to compete on kind of equal terms
- with the people that are already there.
- And then the last one, and this is important,
- is that you have to have really good price information.
- That the buyers and the sellers all
- have to know about each other's prices.
- The buyers need to know all the prices so that they can really
- do good comparison shopping, and the sellers
- need to know everyone's prices so that they can really
- match prices really well.
- So good price information.
- Now, there are many different types
- of markets that somewhat approximate
- perfect competition.
- There are very few that are completely purely
- perfect competition.
- But one of them that does come to mind, one of them that
- does definitely come to mind is the US airline industry.
- And the US airlines-- We can think
- about these different bullet points,
- how closely it matches it.
- There are definitely many different airlines.
- They don't offer identical products.
- I'm sure the airlines would not agree.
- They would say that they're differentiating
- on their service and what type of food they give or, I guess,
- don't give to you, or how much they're
- charging for the baggage check-in and all the rest.
- But for most consumers, they're just like, look,
- I just want an economy class ticket
- from San Francisco to New York, and they view them
- as almost identical products.
- So the airline industry does pretty well
- on this first point.
- No barriers to entry?
- Well, there are some barriers to entry in the airline industry.
- You need a few billion dollars that you
- need to either find or borrow or whatever,
- so that you can buy the capital so you
- can start operating planes.
- Or, I guess you could rent the planes.
- But, either way, you need a lot of capital
- to get into this business.
- You need access to airport terminals
- that you'll have to lease and landing
- rights and all the rest.
- So there are some barriers to entry.
- But for the most part, at least in the United States,
- if you are a US operator-- so there
- are some barriers to entry, especially
- for foreign operators.
- But if you are a US operator and you have the capital
- you will be able to be the next Virgin America or Southwest
- Airlines or JetBlue.
- So there are some barriers to entry, but they are low.
- It's not like the government is saying
- that no one else can start a new airlines.
- No advantage for existing airlines?
- That's somewhat true.
- If I start a new airlines tomorrow
- and it's offering comparable rates and comparable service,
- I could imagine people would be willing to take this airlines.
- So the airline industry seems pretty good there.
- And good price information-- and this
- is why the airline industry definitely came to my mind,
- because I can't imagine an industry where you have better
- price information that at least now, after the internet came
- about-- than in the airline industry
- you want a flight from San Francisco to New York,
- you go to any of these travel sites, Orbits, Kayak,
- Expedia, whatever you want to go to.
- And you get all of the flights listed for you
- and they're listed by price.
- They consort them by price.
- And you can actually pick-- and it's
- known that people do this-- they pick a flight that
- might be $500 or $600, but they can
- compare based on a few pennies or even a few dollars.
- So there's extremely good price information.
- And, obviously, the sellers have all of their IT systems,
- the airlines have all their IT systems
- to keep track of where airline prices are going as well.
- So the air travel industry, like most industries,
- is not absolutely perfect competition,
- but it gets pretty close to perfect competition.
- And you even see that in the real world,
- is that it's very hard for the airlines
- to make really a lot of profit, whether you're
- talking about accounting profit or even economic profit.
- And you can see that from this supply and demand curve
- right over here.
- So on this axis, the horizontal axis, this is the quantity.
- This is a measure of the quantity
- of kind of airline service.
- And we're measuring it in billions
- of seat miles per week, and I know
- that sounds like a strange thing.
- But really, we're just saying, OK,
- in a given week tell me all of the seats that are in use,
- and multiply those number of seats--
- so the seat miles in a given week.
- The number of seats times the miles
- or the average miles per seat in a given week,
- and that gives you how much air travel.
- This is a measure of air travel in, let's say, in the US
- in that week.
- And on this axis, this is the price.
- This is price per, and this should actually
- say price per seat mile.
- And, of course, you have your supply curve right over here.
- This is your supply curve.
- At first, to start providing those first few miles.
- The airlines are willing to do that relatively inexpensively.
- Maybe they're finding that from the most obvious airports
- that maybe the landing rights are cheaper
- or it's cheaper to lease things, or whatever.
- But as they start running more and more and more
- routes, maybe between smaller and smaller cities, maybe
- smaller and less efficient planes,
- it starts to become more and more expensive for them
- to supply those incremental miles.
- And obviously, on the demand side,
- if air travel is very, very expensive,
- very few people are going to want to travel.
- There is going to be very little travel that happens.
- If it's very cheap, many people are going to want to travel.
- Now, let's say that this is where the market is right now.
- Obviously, we have an equilibrium price right
- over there.
- And then we have an equilibrium quantity of seat miles.
- But let's say that the price level in order for the players
- to actually have an economic profit is over here.
- So it is right over here.
- So this is the price needed for zero economic profit,
- or you could say for neutral economic profit.
- Or you could even say for normal profit,
- for economic profit to be equal to zero.
- So at that point, if that is the price, then
- the firms that are offering airline travels,
- they're kind of neutral between shutting down and continuing
- to offer service.
- But notice, the way I've drawn it here
- that is substantially lower than the current equilibrium price.
- So what this is saying is since the current equilibrium
- price is a good bit higher than this,
- or it's just higher at all, these firms in the market right
- now are generating economic profit, definitely
- positive economic profit.
- So what's happening?
- If there is positive economic profit,
- that means that there's an incentive for other firms
- to enter into this industry.
- So what's going to happen is this
- is going to be the supply curve right at that moment.
- But as soon as another carrier realizes
- that they can, or any of the carriers
- realize they can offer more-- it doesn't even
- have to be new carriers entering.
- It could be existing carriers just offering, maybe buying
- more planes or offering more routes.
- Then maybe a little bit later the supply
- curve shifts like this.
- The supply curve shifts like that.
- And then this would be our new equilibrium price.
- But we're still making economic profit
- because our new equilibrium price
- is still higher than the price needed
- for zero economic profit.
- So still more people will continue to enter.
- And so then you might have a new supply
- curve that looks like this.
- And now this is our new equilibrium price.
- And notice what's happening.
- We're traveling down to the right along the demand curve.
- As more supply comes on, we are obviously
- increasing the quantity and the price is going down.
- But still, the equilibrium price is
- higher than this line right over here.
- So even more people will enter, until we
- get to that point right over there.
- And at that point, now the equilibrium price
- is the price at which all of the players
- are having zero economic profit.
- And there's no incentive for more people
- to enter into it, because then the equilibrium price will
- go down, or they're, essentially right
- now economic profit is zero.
- So everyone is neutral in this scenario.
- So I want to leave you there.
- This is what happens with perfect competition.
- That there's no barriers to entry
- and more people go in and in and in, the price goes down,
- the quantity will go up in this scenario.
- But what I want to do in the next video
- is to think about what if we didn't
- have perfect competition.
- And especially, what happens if we
- have something like, I don't know,
- something like a monopoly.
Se específico e indica el tiempo en el video:
En el minuto 5:31, ¿cómo es que la Luna es lo suficientemente grande como para bloquear el Sol? ¿No es el Sol mucho más grande?
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Agradece al autor
¡Esto es genial, por fin entiendo las funciones cuadráticas!
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