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| − | [[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]] - [[Economics_Lecture_Nine|9]] - [[Economics_Lecture_Ten|10]] - [[Economics_Lecture_Eleven|11]] - [[Economics_Lecture_Twelve|12]] - [[Economics_Lecture_Thirteen|13]] - [[Economics_Lecture_Fourteen|14]]<nowiki>]</nowiki>
| + | <center><font size="8"><span style="color: red">'''Hitler</span> was a <span style="color: deeppink">sensitive</span> man'''</font> |
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| − | Seventh Lecture – Competition
| + | [[Image:Hitler6-thumb.jpg|center|750px]]</center> |
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| − | Instructor, Andy Schlafly
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| − | ==Introduction==
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| − | “Today the coach was fired because the team is no longer competitive.” “The problem is that the candidate is no longer competitive in that district.” “The competition was intense for the last remaining tickets to the show.” “The race was very competitive, and the fastest runner won.”
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| − | This class we will discuss “competition”, a term that is familiar to all of you. It is one of the most important terms in all of economics and business. It used to be a big part of school, but has been de-emphasized in the last ten years. Competition still is important in sports.
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| − | Competition has the same meaning in economics as in everyday activities: competition is when several people try to attain the same goal. It could be winning a race or selling a good or service to a potential customer.
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| − | Free enterprise is based on competition bringing out the best in business and the lowest prices for consumers. If a price is too high or a business too inefficient, then competition is what brings a competitor along to do better.
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| − | Opponents of competition say it is wasteful to have multiple people or companies produce the same thing. Or they do not like the way that competition causes someone to lose. Many parents oppose competition in school, because for every winner there is a loser, and that might be their child. Actually, in difficult competitions there can be dozens of losers for every winner. Tournaments, for example, have one winner but many losers.
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| − | However, the same people who oppose competition in business or school can be found watching professional sporting events like the Super Bowl, or entertainment competitions like American Idol. If they are having a medical operation, wouldn’t they want the doctor who had the best grades and track record? Or if they are flying on an airplane, wouldn’t they want the pilot who did the best in flight school and on the job? If competition there is acceptable, then why not in business and school also?
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| − | Competition, in fact, yields enormous benefits for the losers as well as the winners. Competition is a great motivator. It is also an essential part of the “invisible hand” that channels work and supplies towards their most useful purposes. Competition increases efficiency. Competition encourages innovation. It allows to people to do what was thought to be impossible. Whenever we are beaten by a competitor, and all of us experience that many times, we are left to ask ourselves why our competitor was better than we were. Next time, we can do better.
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| − | The U.S. Constitution itself can be understood as system using competition for power to prevent anyone from becoming too powerful. It established three separate branches of government to serve as checks and balances on each other. No individual or branch can grab too much power because the system protects and promotes competition.
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| − | The system of political competition has worked well. When Chief Justice John Marshall expanded Supreme Court power so much that it invalidated a Georgia law applying to Indian land, President Andrew Jackson refused to enforce the Court’s ruling. A century later President Truman ordered a government takeover of the steel mills, and the Supreme Court asserted its power and blocked him. The competition for power prevents any branch from growing too strong.
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| − | Competition in sports drives participants to their very best. No professional football team has ever won three Super Bowls in a row. Why? Because once a team wins the top prize, then all the other teams worker harder to beat it. The other teams become better due to the strong incentive of competition.
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| − | In 1968, an obscure high-jumper named Dick Fosbury was the object of ridicule because he invented a completely different way of jumping over the bar. Everyone else used the obvious way, whereby the jumper runs and kicks one foot up in order to clear and roll over the bar face down. But Fosbury would run up to bar, twist around and then try to glide over the bar headfirst with his back facing downwards, and his face towards the sky. They called his technique the “Fosbury Flop.” It was a bit of a joke until he stunned the sports world by winning the Olympic gold medal in 1968. Rather than lose, everyone started imitating him and the world record advanced at the double its prior rate. The world record using his technique has skyrocketed to about 8 feet high for men.
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| − | The benefits of competition extend even to political campaigns. The presidential race in America is increasingly competitive. So competitive, in fact, that no presidential candidate has won even 50% of the vote from 1992 through 2000. The intense competition tends to keep the power in the hands of the people. A dictator who does not have to face reelection has far more power than an American president does, thanks to this political competition in America.
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| − | Competition is also a great way to motivate yourself. Virtually no one likes to work or study. But people dislike losing even more. Look around at achievements by others and then ask yourself: why not me? Sometimes, the achievers are those who overcome the greatest obstacles. At my local grocery store, the fastest checkout clerk has only one good arm. Yet he is more efficient than all the other clerks who have two good arms. Frequently the best athlete is the one with less God-given skills than others. Rather, the best athlete is often the one who tries the hardest, both in practice and in the game. The same is often true for the best student and the best business.
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| − | In business, the major beneficiaries of competition are the most efficient companies and the consumers. The more competition by grocery stores in town, for example, the lower their prices are likely to be for the consumer. The most efficient grocery store (including considerations like location) will likely be the most profitable and the one that lasts the longest. Businesses know that they have to work hard to beat their competition. Without that competition, it would be very unpleasant for us to shop for goods and services. Communist countries have little competition and many unsatisfied consumers.
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| − | Businesses themselves, however, often dislike competition because it can reduce their ability to earn profits. To protect consumers, federal laws limit the ability of businesses to reduce competition.
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| − | ==Perfect Competition== | |
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| − | Perfect competition is an ideal that rarely exists in practice. But the more competitive the market, the better it is for consumers, so it is useful to consider the conditions for perfect competition:
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| − | 1. Goods that are perfect substitutes for each other must be provided by different companies. Pencils are a good example, because it is a standard good. One brand of pencil substitutes easily for another. Any variance in quality would prevent perfect substitution, and perfect competition.
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| − | 2. There needs to be enough companies making the same good to ensure that is enough real competition. Two or even five students competing for a good grade may not be enough. They may all work less in the expectation that others are working less also. In a large group of students, however, you can be sure that someone is working hard. Likewise, two gas stations on a street corner may not be enough to establish perfect competition. They can watch each other’s prices and both may raise them. But five or so independent gas stations in an area would be competitive.
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| − | 3. The competitors must have identical costs for their supplies. If one competitor, say a gas station, has much higher costs than the others, then it is not going to add much to the competition. Conversely, if a gas station were sitting on top of an oil well, then it may not ensure perfect competition either. It may reap enormous profits at the expense of the consumer, or it may first drive the other gas stations out of business and then raise prices for its gas even higher than what the other stations had been selling it at.
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| − | 4. Fully informed consumers and suppliers are also necessary for perfect competition. If Wendy’s tried to sell a healthy burger but few knew about it, then its competition with greasy burgers by McDonald’s or Burger King is not going to be perfect.
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| − | ==Costs==
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| − | It can be difficult running a business. Your costs will seem to be always rising. If you are profitable, then you can expect competitors to move into your turf and drive your revenue down.
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| − | Why are your costs rising? Three reasons:
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| − | 1. In the short run, you have diminishing marginal productivity. Additional employees are not likely to be as productive as your first employees, for example.
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| − | 2. In the long run, you may have decreasing returns to scale. The bigger you become, the more difficult it is to manage everything and everyone. Waste can get out of hand.
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| − | 3. In the long run, your industry may also see rising prices for the inputs. Your suppliers increase their prices periodically. Scarce resources may become even scarcer.
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| − | Experienced business managers will tell you that profitability is made by reducing expenses. This has certainly been true for Wal-Mart. It is constantly driving costs down with its suppliers. Now it even demands that suppliers guarantee certain profit levels for Wal-Mart itself. It has changed the business landscape by focusing on lowering costs.
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| − | Competition can be harmful to a company on its revenue (or demand) side, but can be very helpful to the same company on its cost (or supply) side. The company can shop around with various suppliers and repeatedly drive the cost of its inputs lower. We will see an example of this in our later section on the homeschool dinner.
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| − | In a perfectly competitive market, a company continues producing a good or service until its marginal revenue (MR) falls to equal its marginal cost (MC). When MC > MR, then the company is better off not producing the good. There is usually no point in making something that is a money-loser, unless it attracts profits in a different way (that is known as a “loss leader” that attracts products for other goods and services of a company).
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| − | ==Homeschool Dinner Event==
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| − | To illustrate the practical aspects of microeconomics, consider a dinner event we held in 2004 and 2005. The goal was to maximize attendance while making a small profit.
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| − | Each student in the class should consider the various committees needed to help accomplish this goal.
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| − | ===On the “supply side”:===
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| − | 1. Selection Committee. This includes choosing the location (probably a church facility), a caterer (probably nearby), and a date (probably a weekday).
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| − | 2. Presentation Committee. This includes planning the evening program (designed to be informative about homeschooling) and picking an outside speaker.
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| − | 3. Event Committee. This includes designing and printing a written program for guests, and supervising the service of food to guests.
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| − | ===On the “demand side”:===
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| − | 1. Ticket Sales Committee. This includes setting the prices, marketing the event, and selling the tickets.
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| − | 2. Program Sales Commitee. This includes seeking business, church and individual sponsors, in exchange for featuring them in the written program.
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| − | 3. Door Committee (managing the door at the event itself: taking and selling tickets, collecting late payments, and making sure the customers are happy).
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| − | Consider for a moment how competition can be very beneficial to this effort, particularly on the “supply side.” To maximize the benefits of competition, the goal is to strive to satisfy the conditions of perfect competition.
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| − | In choosing the caterer, for example, you can reduce your price by considering several competitors. Ask each caterer for a bid, and then compare them. Look for ways to persuade them to reduce their price. Offer, perhaps, to do some the work to save their labor. See if a discount is available for prompt payment, or even payment in advance. See if costs can be reduced by holding the event on a weekday rather than a weekend.
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| − | Choosing a speaker requires an element of competition also. If you fix your mind on one person and do not consider alternatives, then you are unlikely to obtain your best speaker at the lowest possible cost. Again, entertain several different possibilities. Consider why a speaker may want to talk to a group of homeschoolers. Advantages are the youth, intelligence and motivation of the audience. Perhaps the speaker could make more talking to a general audience, but he or she will not have as much influence. Realize that out-of-town speakers will have greater expenses for travel and opportunity costs.
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| − | Printing costs for a program can be reduced by using competition also. Copying costs vary widely among stores. Shop around. Quality is an issue here also, as not all types of copies are perfect substitutes for each other.
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| − | On the demand side, an opposite perspective must be taken. Here you want to reach the highest possible price in selling tickets or spaces for sponsors in the program. Good salesmen or sellers are often the opposite of good buyers. The roles are the inverse of each other.
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| − | What would entice someone to attend a dinner? How can you make the event look as attractive as possible? How should price discrimination be used to maximize the income?
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| − | Here are the prices on a fancy fundraising pro-life dinner dance at a nice hotel that I just received in the mail:
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| − | Table Host (for ten): $2000
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| − | benefactor: $1000 per person
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| − | patron: $500 per person
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| − | sponsor: $250 per person
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| − | supporter: $150 per person
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| − | Can’t attend but enclose donation of _______
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| − | It is trying to raise money for a good cause, and sets its prices on the high side. A popular, conservative congressman is the guest speaker. Do you think this pricing maximizes the amount raised for the worthy cause? Does this use price discrimination?
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| − | ==Assignment==
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| − | Read and, if necessary, reread the above lecture.
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| − | ===Introductory===
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| − | 1. The best friend of free enterprise is ___________.
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| − | 2. Describe how you can use competition to help motivate yourself to accomplish a goal.
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| − | 3. Until Conservapedia.com began, Wikipedia.com did not have any competition. What often happens to a firm or service when there is no competition? Why?
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| − | ===Intermediate===
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| − | 4. Suppose you own a widget factory having fixed costs of $10,000. In addition to the $10,000, you have variable costs of $2,500 for each widget you make. Worse, the factory can make only 3 widgets in an entire year! Your widget sells for $5,000. Someone offered to buy your factory for $10,000. Should you sell it?
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| − | 5. One day, you visit Wal-Mart to see if you can sell it some widgets. Wal-Mart said it has good new and bad news. The good news is that it wants high volume. The bad news is that it wants a price so low that your MC=MR for every unit sold to it. Should you agree? Explain.
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| − | 6. Suppose you own a company that has marginal cost (MC) = $9, average total cost (total cost divided by total output) = $11, average variable cost (average cost of variable inputs, like labor and materials) = $5 and price of the sold good (P) = $8. Should you make any additional goods at these numbers? Should you shut down your company?
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| − | 7. Suppose you are running a dinner event at a free facility that has 24 tables seating 8 apiece. Your marginal cost (MC) is $15 per person. Suppose your speaker costs $3500 in fees and expenses. Suppose your demand curve is this: at price P=$15, quantity Q=200; at P=$35, Q=120; at P=$50, Q=70; at P=$60, Q=40; at P=$150, Q=7. How would you price and market your tickets?
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| − | ===Honors===
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| − | 8. “One of the greatest benefits of competition is accountability.” How?
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| − | 9. Describe an industry where you think competition is nearly perfect, and another industry where competition is far from perfect, and explain why for both.
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| − | 10. Is competition always a good thing?
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