Market Structure, Efficiency, and

1
Market Structure, Efficiency, and Technical
Progress
In this segment we want toexamine the
theoreticalimplications of market structure for
market performance
2
Theory predicts that competitivemarkets lead
to sociallyefficient resource allocation.By
contrast, imperfectly competitivemarket
structures resultin resource misallocation. We
wantto lay out this argument in a formalway.
3
Definitions

• P is market price measured in dollars, yen, lira,
  . . .
• Q is market quantity measured in units, tons,
  bushels, . . .
• TR is total revenue from the sale of goods or
  services
• AR is average revenue
• MR is marginal revenue--the increment to total
  revenue attributable to the last unit sold.

4
Note that
(1)
(2)
and
(3)
5
Definitions, part 2

• TC is total cost--the total cost of producing a
  given quantity of output measured in dollars, yen
  , lira, . . .
• ATC is average total cost or cost per unit of
  output produced.
• MC is marginal cost--the increment to total cost
  attributable to the last unit produced.

Note that
(4)
and
(5)
6
Definitions, part 3

• Pc is the competitive price--the price that would
  prevail in equilibrium in a competitively
  structured market.
• Qc is the competitive output-the output that
  would prevail in equilibrium in a competitively
  structured market.
• PM is the monopoly price--that price that would
  prevail in equilibrium in a monopolistically
  structured market.
• QM is the monopoly output-- the output that would
  prevail in equilibrium in a monopolistically
  structured market.

7
Definitions, part 4

• CS is consumer surplus--the difference between
  what consumers are willing to pay to get a given
  quantity of a good or service and what they
  actually pay for that quantity
• PS is producer surplus--the difference between
  the total revenue received by sellers and the
  minimum revenue that would be sufficient to
  induce sellers to offer that quantity for sale on
  the market.
• TS is the total surplus--the sum of CS and PS,
  that is

8
Pareto Optimality
Resource allocation is sociallyefficient, or
Pareto optimal, if a reallocation of existing
resourcescould not make any one personbetter
off without making at leastone other person
worse off.
The necessary condition for allocative (Pareto)
efficiency isin all markets P MC
9
Demand curve as schedule of marginal benefits (MB)
Market price is an index of the benefits derived
from the production/consumption of the marginal
unit.
Apples
13
Price/bushel ()

• The 51st bushel adds 13 to societys benefits.
• The 117th bushels adds 9 to societys benefits
  from apples.

9
117
51
0
Quantity/bushels
10
PS CPCECS PCAE
TS PS CS CAE
Vertical distance FK is the excess of benefits
over costs for the marginal unit when Q Q1
Price
S ? MC
A
F
E
PC
K
C
D AR MB
0
Quantity
Q1
Q2
QC
11
Competition vs. Monopoly The Welfare Effects
Price, Cost
K
Competitive supply curve
A
PM
E
ATC MC
PC
B
MR
D AR
0
QC
QM
Quantity
12
Competition and Monopoly Compared