Title: Chapter 7 Competitive market
1Chapter 7 Competitive market
2 3Features of 4 market structures
? of firms Entry product market power E.g
P.competition Very many unrestricted Identical None agriculture
Monopolistic C Many unrestricted Differentiated Some Restaurants/retail trade
Oligopoly Few restricted both Limited/ considerable Steel/
monopoly one blocked unique considerable Local utility
4OVERVIEW
- Competitive Environment
- Factors That Shape the Competitive Environment
- Competitive Market Characteristics
- Profit Maximization in Competitive Markets
- Marginal Cost and Firm Supply
- Competitive Market Supply Curve
- Competitive Market Equilibrium
5KEY CONCEPTS
- market structure
- potential entrant
- product differentiation
- competitive markets
- barrier to entry
- barrier to mobility
- barrier to exit
- perfect competition
- price takers
6- normal profit
- economic profit
- economic losses
- marginal analysis
- competitive firm short-run supply curve
- competitive firm long-run supply curve.
7- ??Definition and features
- ?.The demand / MR/ AR curves
- ?.Short run profit maximization
- ?.Short-run supply curve for a single competitive
firm - ?.long-run profit maximization
- ?.Implications
8?.Competitive Environment
- 1.Definition of Market Structure the competitive
environment. - Number of buyers and sellers.
- Potential entrants.
- Barriers to entry and exit, etc.
- Vital Role of Potential Entrants
- Competition comes from actual and potential
competitors. - Potential entrants often affect price/output
decisions.
92.Factors that Shape the Competitive Environment
- Product Differentiation
- RD, innovation, and advertising are important in
many markets. - Production Methods
- Economies of scale can preclude small-firm size.
- Entry and Exit Conditions
- Barriers to entry and exit can shelter incumbents
from potential entrants. - Buyer Power
- Powerful buyers can limit seller power.
10?.Competitive Market Characteristics
- Basic Features
- Many buyers and sellers.
- Product homogeneity.
- Free entry and exit.
- Perfect information.
- Examples
- Agricultural commodities.
- Prominent markets for intermediate goods and
services. - Unskilled labor market.
11- ?.Curves of TR, AR and MR
- Example
- ?? Blanks filling
- ?? To draw the demand curve and the AR and MR
curves.
Q P TR AR MR Ed
0 5
1 5
2 5
3 5
4 5
5 5
12- firm price taker, price ?f( the firms output)
- For individual firm, D curve MR curve AR
curve. (ARP MRP)
P
market
firm
13- ?.Profit maximization
- Q? ?To make the Max profit
- 1. The simple method TC and TR curve.
- Q The greatest/positive gap between TR and TC
curve - Max profitTR-TC
-
- Table 7.1 Fig7.1
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15Profit Maximization in Competitive Markets
- Profit Maximization Imperative
- Normal profit is return necessary to attract and
maintain capital investment. - Efficient firms can earn normal profit.
- Inefficient firms suffer losses.
- Role of Marginal Analysis
- Set Mp MR MC 0 to maximize profits.
- MRMC when profits are maximized.
16- 2.The complicated one
- MCMR ? Q
- Max profit (AR-AC)Q
- Exampletable7.1 fig7.2
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18- Aim Max profit or Min losses in the S.R
- Way by adjusting Q
- Three questions must be answered first
- 1.Should the firm produce?
- 2.If so, how much?
- 3.What will be the profit or loss?
19Answers
- 1.If PgtATC, yes.
- If PATC, yes.
- If ATCgtPgtAVC, yes.
- If P AVC, yes or no
- If PltAVC, no.
20- 2.Q MR MC.
- 3.Max profit / Minloss
- TR-TC(AR-ATC)Q(P-ATC)Q
- Or
- TR-TFC-TVC(TR-TVC)-TFC(P-AVC)Q-TFC
21If P1,Q? If P4, Q? If P3, profit? What is
the minimum Q to produce?
22?.Marginal Cost and Firm Supply curve
- Marginal cost curve is the short-run supply
curve so long as P gt AVC .
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24Long-run Firm Supply
- Marginal cost curve is the long-run supply curve
so long as P gt ATC.
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26?.Competitive Market Supply Curve
- Market Supply With a Fixed Number of Competitors
- Supply is the sum of competitor output.
- Market Supply With Entry and Exit
- Entry results in more firms, increased output, a
rightward shift in the supply curve, and drives
down prices and profits. - Exit reduces the number of firms, decreases the
quantity of output, shifts the supply curve
leftward, and allows prices and profits to rise
for remaining competitors.
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29?.Competitive Market Equilibrium
- Balance of Supply and Demand
- Equilibrium is a balance of supply and demand.
- Normal Profit Equilibrium
- With a horizontal market demand curve, MRP.
- PMRMCATC.
- There are no economic profits.
- All firms earn a normal rate of return.
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