Post on 30-Dec-2015
Microeconomics Unit III: The Theory of the Firm
An Introduction to Market Structure…
The selling environment in which a firm produces and sells its product is called the market structure.
Defined by three characteristics:1. Number of firms in the market2. Ease and entry and exit of firms3. Degree of production differentiation
Market Structure
Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites
Monopolistic competition and oligopoly lie between these two extremes
Introduction….
A perfectly competitive market has the following characteristics:There are many buyers and sellers in the
market.The goods offered by the various sellers are
largely the same.Firms can freely enter or exit the market.Producers and Consumers are relatively well-
informedBuyers and sellers act independent.
What is a competitive market?
As a result of its characteristics, the perfectly competitive market has the following outcomes:The actions of any single buyer or seller in the
market have a negligible impact on the market price.
Each buyer and seller takes the market price as given.
What is a competitive market?
A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker.Buyers and sellers must accept the price
determined by the market.
What is a competitive market?
MR=D=AR=PSince a perfectly competitive firm cannot
alter price as it increases output, total revenue is proportional to the amount of output.
The Revenue of a Competitive Firm
While a competitive firm is a price taker, a monopoly firm is a price maker.
Monopolies
A firm is considered a monopoly if …it is the sole seller of its product.its product does not have close substitutes.
Monopolies
The fundamental cause of monopoly is barriers to entry.
Why do monopolies arise?
Barriers to entry have three sources:Ownership of a key resource.The government gives a single firm the
exclusive right to produce some good.Costs of production make a single producer
more efficient than a large number of producers.
WHY MONOPOLIES ARISE
Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.
Monopoly Resources
Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.Patents and copyrights
Government-Created Monopolies
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
Natural Monopolies
A natural monopoly arises when there are economies of scale over the relevant range of output.
Natural Monopolies
Monopoly versus CompetitionMonopoly
Is the sole producerFaces a downward-sloping demand curveIs a price makerReduces price to increase sales
Competitive FirmIs one of many producersFaces a horizontal demand curveIs a price takerSells as much or as little at same price
HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS
Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.Monopolistic competition
Many firms selling products that are similar but not identical.
OligopolyOnly a few sellers, each offering a similar or
identical product to the others.
Monopolistic Competition
Markets that have some features of competition and some features of monopoly.Attributes of Monopolistic Competition
Many sellers
Product differentiation
Free entry and exit
Monopolistic Competition
Product DifferentiationEach firm produces a product that is at least
slightly different from those of other firms.Rather than being a price taker, each firm
faces a downward-sloping demand curve.
Monopolistic Competition
Free Entry or ExitFirms can enter or exit the market without
restriction.The number of firms in the market adjusts
until economic profits are zero.
Monopolistic Competition
Because of the few sellers, the key feature of oligopoly is the tension between cooperation and self-interest.
MARKETS WITH ONLY A FEW SELLERS
Characteristics of an Oligopoly MarketFew sellers offering similar or identical
productsInterdependent firmsBest off cooperating and acting like a
monopolist by producing a small quantity of output and charging a price above marginal cost
MARKETS WITH ONLY A FEW SELLERS
Visual 3.1http://apeconomics.ncee.net
Different Types of Market Structures