Chapter 7 Competitive market

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Chapter 7 Competitive market
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• Market structure

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Features 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
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OVERVIEW

• 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

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KEY CONCEPTS

• market structure
• potential entrant
• product differentiation
• competitive markets
• barrier to entry
• barrier to mobility
• barrier to exit
• perfect competition
• price takers

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• normal profit
• economic profit
• economic losses
• marginal analysis
• competitive firm short-run supply curve
• competitive firm long-run supply curve.

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• ??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

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?.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.

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2.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.

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?.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.

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• ?.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
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• firm price taker, price ?f( the firms output)
• For individual firm, D curve MR curve AR
  curve. (ARP MRP)

P
market
firm
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• ?.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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Profit 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.

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• 2.The complicated one
• MCMR ? Q
• Max profit (AR-AC)Q
• Exampletable7.1 fig7.2

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• 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?

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Answers

• 1.If PgtATC, yes.
• If PATC, yes.
• If ATCgtPgtAVC, yes.
• If P AVC, yes or no
• If PltAVC, no.

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• 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

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If P1,Q? If P4, Q? If P3, profit? What is
the minimum Q to produce?

• ?

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?.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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Long-run Firm Supply

• Marginal cost curve is the long-run supply curve
  so long as P gt ATC.

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?.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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?.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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