Market Stuctures

1
Market Stuctures
What is a market?
where buyers and sellers get together
2
Market Types
Pure Competition
aka Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
3
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
4
Market Structures
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Number of Firms
Many small
Many small
A few large
one
Considers action or reaction of other firms
Importance
Diff or Homog
Differentiated
Homogeneous
Product type
one
Need to stress differences?
Importance
Barriers to Entry
none
none
large
large
Long run profits possible?
Importance
Price Taker/Maker
taker
taker/seeker
maker
maker
Ability to influence market price?
Importance
Non-price Competition
no
yes
yes
yes
As important as price?
Importance
5
Market Characteristics
1. Number of Sellers
2. Product Types
3. Entry and Exit
4. Non-Price Competition
5. Economic Profits
6. Price Maker/Taker
6
Pure Competition
Characteristics?
1. Many Sellers
2. Identical Products
3. Easy Entry and Exit
4. No Non-Price competition
5. SR profits/losses, no LR profits
6. Price Taker
7
Monopolistic Competition
Characteristics?
1. Many Sellers
2. Differentiated Products
3. Easy Entry and Exit
4. Non-Price competition
5. SR profits/losses, no LR profits
6. Price Taker
8
Oligopoly
Characteristics?
1. Few Sellers
2. Differentiated or Identical Products
3. Difficult Entry and Exit
4. Non-Price competition
5. LR profits/losses
6. Price Maker
9
Monopoly
Characteristics?
1. One Seller
2. Single Product
3. Blocked Entry
4. Non-Price competition
5. LR profits
6. Price Maker
10

• Into which of the 4 market structures would you
  place each of the following
• A small organic farm producing herbs on 5 acres
• A large grain farm producing wheat on 2,500 acres
• A major airline
• A community college
• A local water company that faces no direct
  competition
• A small retail shoe store in a large mall
• A discount shoe store in a large city
• A college food service
• The long-term parking facility at an airport
• Passenger service on Amtrak
• The best bakery in town

c. Monopolistic Competition
a. Monopoly
b. Oligopoly
d. Pure Competition
11
Pure Competition
A
Economic Profit?
B
Normal Profit?
C
Losing Money?
12
Pure Competition
Equilibrium
Price
Operating at Minimum ATC
6
ATC
MC
5
4
3
2
1
0
10
20
30
40
50
60
Quantity
13
Competitive Market Demand
Each Firm Makes Production Decisions Based on
Prices
Price
6
Firm 2
Firm1
Firm 3
Firm 4
5
4
3
2
1
0
10
20
30
40
50
60
Quantity
14
Competitive Market Demand
Producers and Consumers Determine Price
Price
Consumer Demand
6
D
S
5
Producer Supply
4
3
2
D
1
S
0
10
20
30
40
50
60
Quantity
15
Competitive Market Demand
Each producer can sell as much as they want at
Market Price
Price
6
Firm1
Firm 3
Firm 4
5
4
Demand Curve Faced by Firms
D
3
2
1
0
10
20
30
40
50
60
Quantity
16
Elasticity
Elastic
Inelastic
Perfectly Inelastic
Perfectly Elastic
17
Pure Competition
Equilibrium
Price
Operating at Minimum ATC
6
ATC
MC
5
4
3
Price Demand MR
2
1
0
10
20
30
40
50
60
Quantity
18
Profits and Losses
Entry and Exit
Case 1 Prices rise
Profits
Entry or Exit?
Supply
19
SR Profits
1. Price goes up
2. Firms enter, Supply increases
Price
3. Price goes down
6
ATC
MC
5
4
SR Profits
3
Price Demand MR
2
4. No LR Profits
1
0
10
20
30
40
50
60
Quantity
20
Profits and Losses
Entry and Exit
Case 2 Prices fall
Profits
Entry or Exit?
Supply
21
SR Losses
1. Price goes down
2. Firms leave, Supply decreases
Price
3. Price goes up
6
ATC
MC
5
4
P D MR
3
SR Losses
2
4. No LR Losses
1
0
10
20
30
40
50
60
Quantity
22
Monopolistic Competition
Characteristics?
1. Many Sellers
2. Differentiated Products
3. Easy Entry and Exit
4. Non-Price competition
5. SR profits/losses, no LR profits
6. Price Taker
23
McHits or McMisses?
Hulaburger - 1962
Filet o Fish - 1963
Strawberry shortcake - 1966
Big Mac - 1968
Hot Apple Pie - 1968
Egg McMuffin - 1975
Drive Thru - 1975
Chicken McNuggets - 1983
Extra Value Meal - 1991
McLean Deluxe - 1991
Arch Deluxe - 1996
55-cent Special - 1997
Big Xtra - 1999
McRib and others ??
24
Main McDonalds Menu                   
                                               
                                              
                                     
Big Mac
Big N Tasty
Big N Tasty w/ Cheese
Quarter Pounder w/ Cheese
Double Quarter Pounder w/ Cheese
Crispy Chicken
Chicken McGrill
Filet-O-Fish
Double Cheeseburger
Cheeseburger
Hamburger
Chicken McNuggets (4)
Chicken McNuggets (6)
Chicken McNuggets (9)
McSalad Shaker Chef Salad
McSalad Shaker Garden Salad
McSalad Shaker Grilled Chicken Caeser Salad
Fish Supreme Chicken Parmesan Sandwich 2/3 lb.
Monster Thickburger 1/3 lb. Low Carb
Thickburger Little Thick Cheeseburger 1/4 lb.
Little Thickburger 1/3 lb. Cheeseburger Chili
Cheese Thickburger 1/3 lb. Original
Thickburger 1/3 lb. Mushroom 'N' Swiss
Thickburger 1/3 lb. Bacon Cheese Thickburger
Big Chicken Fillet Sandwich Charbroiled Chicken
Club Sandwich Charbroiled BBQ Chicken Sandwich
Big Hot Ham 'N' Cheese Regular Hamburger
Regular Cheeseburger Double Cheeseburger
5-Piece Chicken Breast Strips 7-Piece Chicken
Breast Strips Big Shef
25
Double Jr. Cheeseburger Deluxe 1/4 lb. Single 1/2 lb. Double with Cheese 3/4 lb. Triple with Cheese
Baconator Jr. Hamburger Jr. Bacon Cheeseburger Jr. Cheeseburger Deluxe
Jr. Cheeseburger Double Stack Deluxe Double Stack Triple Stack
Homestyle Chicken Go Wrap Grilled Chicken Go Wrap Spicy Chicken Go Wrap Crispy Chicken Deluxe
Chicken Club Ultimate Chicken Grill Spicy Chicken Sandwich Homestyle Chicken Fillet
10-piece Chicken Nuggets Premium Fish Fillet Sandwich Crispy Chicken Sandwich
26
Monopolistic Competition Demand
Differentiated Product means Down-sloping Demand
Curve
Price
6
Elastic or Inelastic?
5
4
Demand Curve Faced by Firms
3
2
D
1
0
10
20
30
40
50
60
Quantity
27
SR Profits
Long Run Equilibrium
Price
Not at Minimum ATC
6
ATC
5
4
3
Demand
2
1
0
10
20
30
40
50
60
Quantity
28
Profits and Losses
Entry and Exit
Case 1 Prices rise
Profits
Entry or Exit?
Supply
29
SR Profits
1. Increased Demand, Price goes up
2. Firms enter, Demand faced by each firm
decreases
Price
6
ATC
5
4
SR Profits
3
Demand
2
3. Price goes down
1
4. No LR Profits
0
10
20
30
40
50
60
Quantity
30
Profits and Losses
Entry and Exit
Case 2 Prices fall
Profits
Entry or Exit?
Supply
31
SR Losses
1. Demand falls, Price goes down
2. Firms leave, Demand faced by each firm
increases
Price
6
ATC
5
4
Demand
3
SR Losses
2
3. Price goes up
1
4. No LR Losses
0
10
20
30
40
50
60
Quantity
32
Oligopoly
Characteristics?
1. Few Sellers
2. Differentiated or Identical Products
3. Difficult Entry and Exit
4. Non-Price competition
5. LR profits/losses
6. Price Maker (Price Leaders)
33
Oligopolistic Demand
Different Expectations Above and Below Market
Price
Price
Elastic and Inelastic
6
Elastic Above P
5
P
4
A Kinked Demand Curve
3
2
Inelastic Below P
1
0
10
20
30
40
50
60
Quantity
34
1. One Seller
2. One Product
3. Blocked Entry (and exit?)
4. Non-Price competition
5. LR profits/losses
6. Price Maker (to maximize profits)
35
Monopolist's Demand
Monopolist finds Price and Quantity that
Maximizes Profit
Price
Elastic or Inelastic?
6
5
4
3
Demand Curve Faced by the Monopolist
2
D
1
0
10
20
30
40
50
60
Quantity