This is a framework of a story I came up with which I used to explain three types of competition in economics. It begins with a family of weavers of fine wool carpets, who own their own sheep, in the 14th century Indus Valley, India. I had to learn about sheep to help me understand markets! Please help yourself to the ideas and the explanations.
The actual interaction between the characters, you will have to imagine for yourself.
Three
types of competition: pure, imperfect, and monopoly.
If
there were
once four siblings who were all taught by their parents how to make
fine carpets in
the Indus valley, in
14thcentury
India,
the
same way, to the same design, and with the same dyed wool from
their own sheep,
and sold these carpets in the market place in the village square
alongside their father and mother at such a low price that no-one
else could
make a profit selling carpets in the village, that family would have
a monopoly selling carpets in that village.
If, in the region in
which their
village lay, there were sixteen
other carpet makers who were also sheep
owners and wool spinners, and they produced carpets to designs that
very closely resembled the designs of the two parents and their four
offspring, and sold their
carpets
at a very close price to each other, and
no-one else in the region could match their prices there
would be perfect
competition. Perfect
or
pure competition
is when a firm producing near identical goods to its competitors, has
some control over its prices. Since all these producers
or families have vertically integrated businesses the barrier to
entry into their market is high to carpet makers who own no sheep and
cannot process wool. These
new carpet markets wanting to enter the market
would need to buy wool either locally
or from further afield, and the original
producers
could sell their carpets at below the production
costs, including the cost of wool,that
new entrants to the market would necessarily have
to pay.
Most
importantly here, is we must realise that no-one is getting rich in
this regional community; they
are only taking the opportunity to make sufficient money to feed the
family members and care for their sheep (sustenance
farming and production).
Two marriages and worrying times
If
two
daughters of one of the sixteen competitors married
into our first described family there would be extra mouths to feed
there,
notwithstanding that a dowry would go
along with the brides because they were considered to be a drain on
resources in ancient civilisations, as
in, take my hungry, weak and useless daughters away.
This dowry could well be a bunch of sheep going along with each
bride. What we have now is a larger flock of sheep owned by our first
family AND two extra very capable shepherdesses
with sticks, who are also wool
carders, spinners, dyers, and weavers. Three outcomes can occur,
a)
the quantity of extra sheep provides only sufficient revenue to
continue to live hand-to-mouth for
a household of, now eight people;
b) each of these newly married brothers go off with their brides and
their new sheep and produce carpets to the same
design elsewhere in the region; or
c) these two
brothers and their wives
go off, taking
their sheep with them,
and make carpets to a new
design elsewhere in the region.
Solutions, but it won't be easy
a)
despite there being a larger quantity of carpets available
for sale by one whole larger
family
it only fills the gap left by the lessened
production of the families from whence the brides came; and
these
families have less sheep to produce wool. There
is no
change to the market in terms of supply or demand, no
riches made and no competitive
edge is manifested. Nonetheless,
this family of eight would have a larger share of the carpet market
in their village.
b)
the supply of carpets in the village is reduced as a result that our
first family
has
lost key workers when
the brothers depart,
yet
the quantity
of raw
material, being the original
remaining
sheep, stays
the same (the same number as there were before the two brothers left,
taking their hungry mouths with them – and
their wives).
Now, there is a surplus of sheep and not enough people to process
their wool, or there is a surplus of wool and not enough people to
process it into carpets. In any case, either the sheep are sold or
the wool is sold. In
the
first
case, there is an opportunity for a new entrant to the market to set
up a virtually integrated business by purchasing sheep; or in
the latter, a
business
buying wool to make carpets to a new and exciting design that
competes in the same market square
in
the village as
the plain and
similar designs
already sold there. Nothing has really changed by the entrance of a
new design until the old
carpet
producers recognise that the demand for the new design is undermining
the demand for their plain designs. At this time, some of the
existing
carpet makers may change their designs to represent their family
history. This
is
product differentiation.
Now, in the market square there are many different and exciting
designs and the beginning of brand awareness and brand loyalty
(initially through family connections with one or other family of
carpets makers). This is monopolistic competition. Monopolistic
because the designs represent individual families and their
ancestors and no-one else will ever make the same designs; doing
so would disparage their own family and ancestors. Yet
there is still competition in the market sector.
c)
the two brothers, their wives, with
their dowry sheep, form a collective and farm the same area. They
have to because they cannot care for the sheep, shear the sheep
(actually
primitive sheep had wool that could just be pulled off (by ‘rooing’),
wash, card, spin, and weave the wool into carpets, and sell the
carpets in their newly found village market square when they are
existing only as two
pairs of people. Such is the lack of labour, this
band of
carpet producers, recognising that a good design sells well in
another market, weave carpets to a design that has vivid colours that
deeply contrast, but
due to time constraints and lack of labour settle on designs
apropos to nothing;one
that any carpet maker could easily copy or use as a
design
idea (deeply contrasting
colours). When
other carpet makers produce similar carpets to the brothers and their
wives, there is perfect competition, where
a large number of small firms supply an identical product. In
this example, identical means vivid contrasting colours apropos to
nothing in wool carpets.
Sibling Rivalry Aside
As
yet, there is nothing to propel a producer into having an advantage;
there are no real constraints in design, no recognised regulations,
and no changes in efficiency or production costs.
However,
when the two brother’s parents
die, their two
unmarried brothers
who
were living with their parents have,
now surplus, sheep and wool that could be sold as carpets but would
provide more than enough money for two mouths, if they could only
process
it and have the time to sell it. They could sell the sheep, sell the
wool, or form a company with their married brothers and their wives
to make only the new and exciting carpet designs, which
sell really well but so
far lack
brand awareness and brand loyalty.
So
far no change, you think, this
is simply going back
to six mouths to feed (four brothers and two wives instead of two
parents and four brothers). Yet the dowry has swelled the flock in
two distinct ways; by direct addition; and by husbandry.
Numbers
in this example are kept to a value that is easily understood. Ten
ewes and one ram will typically produce ten lambs per year, which can
be
sheared / (rooed)to
keep them cool in hot weather. When the lambs are two thirds of their
adult size/weight they can be tupped or mated. This could be when
they are one year old to give birth when they are eighteen months
old, but
more likely on poor soil and with primitive sheep, tupped when they
are two years old and birthing at two and a half. But let’s
say there are lambs every year.
(for
ease of counting and multiplication)
Yet,
by the addition of four more ewes as two dowries, two more
female
and two more
male
lambs could be born.
Without
eating any, and with impressive shepherding and predator deterrents,
and no other losses, the
original
flock of eleven in
the year 1300, (ten
ewes and one
ram), with
each ewe producing
one lamb a year,
could in six years time (1306
AD) be
a flock of:
30
new ewes
from the original ten ewes (and
30
male)Total
60 lambs were
born
Born
in 1301 AD and tupped in 1303 AD, fiveewesbeing
thefirst
home
generation would
produce in 1304 – 1306 AD perhaps two or three female
lambs
in
each year (total 7
of each sex over three
years)
Born
in 1305 AD to the first home generation two or three ewes in 1305
would be tupped and produce one or two lambs in 1306 AD
-
making a total of 35new
ewes
ready for tupping in
1306 AD and thirty nine male lambs
that have been for the cooking pot over
six years
plus
the ten original ewes equals
45 ewes ready for tupping in 1306 AD
With
four extra ewes (dowries) there is the immediate addition of four
?fleeces and then:
2
new female lambs from the dowry
ewes (and
2
male) every
year
for six
years (total of 12
lambs of each sex)
1
new
female lamb born
each
year in
1303
AD to
1306
AD from
the first
dowry
ewe’soffspring
every
year
(total of 4
lambs of each sex over three
years)
The
flock size is now 69,
including the original 11 and
4 dowry ewes.
Unfortunately, a ram cannot service this many in a short period and
it is preferable to have lambs born in safe seasonal weather so there
needs to be three
rams for this flock size (so a bit less to eat for the owners then)
which
makes the whole flock size 72 sheep, twenty one of these ewes are
four dowry ewes and their seventeen descendants.
In
reality, ewes about to give birth experience a reduction in immunity
to internal parasites and
die or give birth to stillborns. Increasing the size of a flock will
not change the incidence of this type of death. However, increasing
the size of a flock will reduce the percentage of losses to
predators, yet, will require greater shepherding with big sticks. So,
here, there is a human resource problem that could inhibit flock
size. On top of that is the ground and area on which a flock feeds
which may support a specific flock size but cannot also provide the
extra nutrition that ewes need in the final month of gestation
(Approximately
70 percent of fetal growth occurs during the last month of
pregnancy).
So,
nutrition is a contributing factor in inhibiting
flock size.
Time to say goodbye
The
four brothers and the two wives cannot hope to increase their market
share if they all live in the same village with
the same pasture.
So, their market share remains the same in their respective villages.
However, we have a workforce of six young persons and a large area of
grazing, separated
into two, which
was not available in the same quantity or quality as when there was
two parents and four brothers. Furthermore, there are more sheep to
breed from (dowry) and a larger quantity of lambs born per year on
a wider pasture to
the same number of people with hungry mouths; these
mouths and
stomachs
are now
better
satiated
by eating the respectively larger quantity of male lambs. Hence,
there is a surplus of raw material (sheep
as
ewes)
that
will eventually
be constrained by land and nutrition resources.
The 'Six'
We
might look at this as the four brothers and two wives (‘The
Six’) having
a reduction of average costs; but since this is a vertically
integrated business we are primarily considering the
reduction in
opportunity cost until we realise that already the six people are
fully occupied in husbandry and wool processing, so there is no
reduction of
human interaction or
no spare time. Or, we could consider an economy of scale; but there
would now need to be employees to add to the already overwhelmed
labour resource. Luckily for ‘The Six’, because no-one could
enter the same perfect market as they and their competitors, there
are available workers in both villages who could be paid to process
wool,
or the
surplus wool
can be sold off cheap to them to
process for themselves. This is the stage at which sustenance farming
changes into specialised jobs within an industry. The brothers may
fight the sheep predators, grab handfuls of wool (rooing),
and weave and
sell carpets
while the wives and workers process the wool and also weave carpets.
As long as the production costs do not rise too significantly the
rate at which ‘The
Six’ can
produce funky
carpets will increase. This is an example of an economy of scale
because the unit cost
is reduced, but only in terms of opportunity cost. However,
specialised focus on a single task brings about faster production
and
superior quality products as aptitude for a task is better utilised
and experience grows more rapidly. However,
there is an attendant cost of wages for extra workers in
this example. Faster
processing from developed skill-sets may cover the wage costs and
result in higher carpet production rates, thereby reducing overall
costs.
Where
there is a competitive advantage, such as an economy of scale, a
perfect market is destroyed and an imperfect market takes its place.
An economy of scale that cannot be matched is a barrier to entry in
the market.
In
addition to declining costs, other barriers leading to imperfect
competition are legal restrictions, (patents or government regulation), high entry costs, advertising, and product
differentiation.
In
this whole example, towards
the beginning, we
have a loyal customer base buying traditionally crafted carpets from
separate families who design and make carpets specific to their
family ancestors, with each family making a different design. This
means that the producers could set their own price as their carpet is
somewhat more or less desirable to a
buyer than a competitor’s as the
buyer’s loyalty
wins out. A
new design with a strong contrast of colours entered the market as a
free-to-purchase
item with no guilt attached to the buyer. Then ‘The Six’ produced
the funky carpets
in high volume in two villages. Because the same funky designsare
available
in two villages advertising
at no financial cost is established. A buyer can buy a carpet made
by ‘The
Six’ closer to their home and more people, as visitors, will see
those
carpets, especially when the carpets are taken out of the home to be
beaten outside.
Of course, in 14th
century India not many people travelled beyond
the next village. However, in a city, just like the prevalence of
sheep in remote areas, the more incidences of something the greater
the multiplication of reproduction. So, more incidences of funky
carpets creates a wider reproduction of wondrous perception and
experience in passers-by or home visitors.
Rooing sheep in the Indus Valley - a storyline with economics
Blog address for all the posts: https://learn1.open.ac.uk/mod/oublog/view.php?u=zw219551
[ 18 minute read ]
This is a framework of a story I came up with which I used to explain three types of competition in economics. It begins with a family of weavers of fine wool carpets, who own their own sheep, in the 14th century Indus Valley, India. I had to learn about sheep to help me understand markets! Please help yourself to the ideas and the explanations.
The actual interaction between the characters, you will have to imagine for yourself.
Three types of competition: pure, imperfect, and monopoly.
If there were once four siblings who were all taught by their parents how to make fine carpets in the Indus valley, in 14th century India, the same way, to the same design, and with the same dyed wool from their own sheep, and sold these carpets in the market place in the village square alongside their father and mother at such a low price that no-one else could make a profit selling carpets in the village, that family would have a monopoly selling carpets in that village.
If, in the region in which their village lay, there were sixteen other carpet makers who were also sheep owners and wool spinners, and they produced carpets to designs that very closely resembled the designs of the two parents and their four offspring, and sold their carpets at a very close price to each other, and no-one else in the region could match their prices there would be perfect competition. Perfect or pure competition is when a firm producing near identical goods to its competitors, has some control over its prices. Since all these producers or families have vertically integrated businesses the barrier to entry into their market is high to carpet makers who own no sheep and cannot process wool. These new carpet markets wanting to enter the market would need to buy wool either locally or from further afield, and the original producers could sell their carpets at below the production costs, including the cost of wool, that new entrants to the market would necessarily have to pay. Most importantly here, is we must realise that no-one is getting rich in this regional community; they are only taking the opportunity to make sufficient money to feed the family members and care for their sheep (sustenance farming and production).
Two marriages and worrying times
If two daughters of one of the sixteen competitors married into our first described family there would be extra mouths to feed there, notwithstanding that a dowry would go along with the brides because they were considered to be a drain on resources in ancient civilisations, as in, take my hungry, weak and useless daughters away. This dowry could well be a bunch of sheep going along with each bride. What we have now is a larger flock of sheep owned by our first family AND two extra very capable shepherdesses with sticks, who are also wool carders, spinners, dyers, and weavers. Three outcomes can occur,
a) the quantity of extra sheep provides only sufficient revenue to continue to live hand-to-mouth for a household of, now eight people;
b) each of these newly married brothers go off with their brides and their new sheep and produce carpets to the same design elsewhere in the region; or
c) these two brothers and their wives go off, taking their sheep with them, and make carpets to a new design elsewhere in the region.
Solutions, but it won't be easy
a) despite there being a larger quantity of carpets available for sale by one whole larger family it only fills the gap left by the lessened production of the families from whence the brides came; and these families have less sheep to produce wool. There is no change to the market in terms of supply or demand, no riches made and no competitive edge is manifested. Nonetheless, this family of eight would have a larger share of the carpet market in their village.
b) the supply of carpets in the village is reduced as a result that our first family has lost key workers when the brothers depart, yet the quantity of raw material, being the original remaining sheep, stays the same (the same number as there were before the two brothers left, taking their hungry mouths with them – and their wives). Now, there is a surplus of sheep and not enough people to process their wool, or there is a surplus of wool and not enough people to process it into carpets. In any case, either the sheep are sold or the wool is sold. In the first case, there is an opportunity for a new entrant to the market to set up a virtually integrated business by purchasing sheep; or in the latter, a business buying wool to make carpets to a new and exciting design that competes in the same market square in the village as the plain and similar designs already sold there. Nothing has really changed by the entrance of a new design until the old carpet producers recognise that the demand for the new design is undermining the demand for their plain designs. At this time, some of the existing carpet makers may change their designs to represent their family history. This is product differentiation. Now, in the market square there are many different and exciting designs and the beginning of brand awareness and brand loyalty (initially through family connections with one or other family of carpets makers). This is monopolistic competition. Monopolistic because the designs represent individual families and their ancestors and no-one else will ever make the same designs; doing so would disparage their own family and ancestors. Yet there is still competition in the market sector.
c) the two brothers, their wives, with their dowry sheep, form a collective and farm the same area. They have to because they cannot care for the sheep, shear the sheep (actually primitive sheep had wool that could just be pulled off (by ‘rooing’), wash, card, spin, and weave the wool into carpets, and sell the carpets in their newly found village market square when they are existing only as two pairs of people. Such is the lack of labour, this band of carpet producers, recognising that a good design sells well in another market, weave carpets to a design that has vivid colours that deeply contrast, but due to time constraints and lack of labour settle on designs apropos to nothing; one that any carpet maker could easily copy or use as a design idea (deeply contrasting colours). When other carpet makers produce similar carpets to the brothers and their wives, there is perfect competition, where a large number of small firms supply an identical product. In this example, identical means vivid contrasting colours apropos to nothing in wool carpets.
Sibling Rivalry Aside
As yet, there is nothing to propel a producer into having an advantage; there are no real constraints in design, no recognised regulations, and no changes in efficiency or production costs.
However, when the two brother’s parents die, their two unmarried brothers who were living with their parents have, now surplus, sheep and wool that could be sold as carpets but would provide more than enough money for two mouths, if they could only process it and have the time to sell it. They could sell the sheep, sell the wool, or form a company with their married brothers and their wives to make only the new and exciting carpet designs, which sell really well but so far lack brand awareness and brand loyalty.
So far no change, you think, this is simply going back to six mouths to feed (four brothers and two wives instead of two parents and four brothers). Yet the dowry has swelled the flock in two distinct ways; by direct addition; and by husbandry.
Numbers in this example are kept to a value that is easily understood. Ten ewes and one ram will typically produce ten lambs per year, which can be sheared / (rooed) to keep them cool in hot weather. When the lambs are two thirds of their adult size/weight they can be tupped or mated. This could be when they are one year old to give birth when they are eighteen months old, but more likely on poor soil and with primitive sheep, tupped when they are two years old and birthing at two and a half. But let’s say there are lambs every year. (for ease of counting and multiplication)
Yet, by the addition of four more ewes as two dowries, two more female and two more male lambs could be born.
Without eating any, and with impressive shepherding and predator deterrents, and no other losses, the original flock of eleven in the year 1300, (ten ewes and one ram), with each ewe producing one lamb a year, could in six years time (1306 AD) be a flock of:
30 new ewes from the original ten ewes (and 30 male) Total 60 lambs were born
Born in 1301 AD and tupped in 1303 AD, five ewes being the first home generation would produce in 1304 – 1306 AD perhaps two or three female lambs in each year (total 7 of each sex over three years)
Born in 1305 AD to the first home generation two or three ewes in 1305 would be tupped and produce one or two lambs in 1306 AD
- making a total of 35 new ewes ready for tupping in 1306 AD and thirty nine male lambs that have been for the cooking pot over six years
plus the ten original ewes equals 45 ewes ready for tupping in 1306 AD
With four extra ewes (dowries) there is the immediate addition of four ?fleeces and then:
2 new female lambs from the dowry ewes (and 2 male) every year for six years (total of 12 lambs of each sex)
1 new female lamb born each year in 1303 AD to 1306 AD from the first dowry ewe’s offspring every year (total of 4 lambs of each sex over three years)
The flock size is now 69, including the original 11 and 4 dowry ewes. Unfortunately, a ram cannot service this many in a short period and it is preferable to have lambs born in safe seasonal weather so there needs to be three rams for this flock size (so a bit less to eat for the owners then) which makes the whole flock size 72 sheep, twenty one of these ewes are four dowry ewes and their seventeen descendants.
In reality, ewes about to give birth experience a reduction in immunity to internal parasites and die or give birth to stillborns. Increasing the size of a flock will not change the incidence of this type of death. However, increasing the size of a flock will reduce the percentage of losses to predators, yet, will require greater shepherding with big sticks. So, here, there is a human resource problem that could inhibit flock size. On top of that is the ground and area on which a flock feeds which may support a specific flock size but cannot also provide the extra nutrition that ewes need in the final month of gestation (Approximately 70 percent of fetal growth occurs during the last month of pregnancy). So, nutrition is a contributing factor in inhibiting flock size.
Time to say goodbye
The four brothers and the two wives cannot hope to increase their market share if they all live in the same village with the same pasture. So, their market share remains the same in their respective villages. However, we have a workforce of six young persons and a large area of grazing, separated into two, which was not available in the same quantity or quality as when there was two parents and four brothers. Furthermore, there are more sheep to breed from (dowry) and a larger quantity of lambs born per year on a wider pasture to the same number of people with hungry mouths; these mouths and stomachs are now better satiated by eating the respectively larger quantity of male lambs. Hence, there is a surplus of raw material (sheep as ewes) that will eventually be constrained by land and nutrition resources.
The 'Six'
We might look at this as the four brothers and two wives (‘The Six’) having a reduction of average costs; but since this is a vertically integrated business we are primarily considering the reduction in opportunity cost until we realise that already the six people are fully occupied in husbandry and wool processing, so there is no reduction of human interaction or no spare time. Or, we could consider an economy of scale; but there would now need to be employees to add to the already overwhelmed labour resource. Luckily for ‘The Six’, because no-one could enter the same perfect market as they and their competitors, there are available workers in both villages who could be paid to process wool, or the surplus wool can be sold off cheap to them to process for themselves. This is the stage at which sustenance farming changes into specialised jobs within an industry. The brothers may fight the sheep predators, grab handfuls of wool (rooing), and weave and sell carpets while the wives and workers process the wool and also weave carpets. As long as the production costs do not rise too significantly the rate at which ‘The Six’ can produce funky carpets will increase. This is an example of an economy of scale because the unit cost is reduced, but only in terms of opportunity cost. However, specialised focus on a single task brings about faster production and superior quality products as aptitude for a task is better utilised and experience grows more rapidly. However, there is an attendant cost of wages for extra workers in this example. Faster processing from developed skill-sets may cover the wage costs and result in higher carpet production rates, thereby reducing overall costs.
Where there is a competitive advantage, such as an economy of scale, a perfect market is destroyed and an imperfect market takes its place. An economy of scale that cannot be matched is a barrier to entry in the market.
In addition to declining costs, other barriers leading to imperfect competition are legal restrictions, (patents or government regulation), high entry costs, advertising, and product differentiation.
In this whole example, towards the beginning, we have a loyal customer base buying traditionally crafted carpets from separate families who design and make carpets specific to their family ancestors, with each family making a different design. This means that the producers could set their own price as their carpet is somewhat more or less desirable to a buyer than a competitor’s as the buyer’s loyalty wins out. A new design with a strong contrast of colours entered the market as a free-to-purchase item with no guilt attached to the buyer. Then ‘The Six’ produced the funky carpets in high volume in two villages. Because the same funky designs are available in two villages advertising at no financial cost is established. A buyer can buy a carpet made by ‘The Six’ closer to their home and more people, as visitors, will see those carpets, especially when the carpets are taken out of the home to be beaten outside.
Of course, in 14th century India not many people travelled beyond the next village. However, in a city, just like the prevalence of sheep in remote areas, the more incidences of something the greater the multiplication of reproduction. So, more incidences of funky carpets creates a wider reproduction of wondrous perception and experience in passers-by or home visitors.