Chapter 7 Competitive market

Market structure

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

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

KEY CONCEPTS

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

normal profit economic profit economic losses marginal analysis competitive firm short-run

supply curve competitive firm long-run supply

curve.

一、 Definition and features二 .The demand / MR/ AR curves

三 .Short –run profit maximization四 .Short-run supply curve for a single

competitive firm五 .long-run profit maximization六 .Implications

一 .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.

2.Factors that Shape the Competitive Environment

Product Differentiation R&D, 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.

一 .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.

二 .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

firm= price taker, price ≠f( the firm’s output)

**For individual firm, D curve = MR curve= AR curve. (AR=P; MR=P)

market firm

P

三 .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 profit=TR-TC Table 7.1 Fig7.1

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 Mπ = MR – MC = 0 to maximize

profits. MR=MC when profits are maximized.

2.The complicated one: MC=MR → Q* Max profit = (AR-AC)*Q

Example:table7.1 fig7.2

Aim: Max profit or Min losses in the S.RWay: 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?

Answers:

1.If P>ATC, yes. If P=ATC, yes. If ATC>P>AVC, yes. If P= AVC, yes or no If P<AVC, no.

2.Q*: MR= MC.

3.Max profit / Minloss:

TR-TC=(AR-ATC)*Q=(P-ATC)*QOr TR-TFC-TVC=(TR-TVC)-TFC=(P-AVC)*Q-TFC

。P

Q.q1 q2 q3 q4

P4

P3

P2

p1

MC

ATC

AVC

If P1,Q*=? If P4, Q*=? If P3, profit=?

What is the minimum Q to produce?

四 .Marginal Cost and Firm Supply curve

Marginal cost curve is the short-run supply curve so long as P > AVC .

Long-run Firm Supply

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

五． 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.

六． 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, MR=P.

P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.