Market Structures MONOPOLY OLIGOPOLY MONOPOLISTIC COMPETITION Competitive Markets.
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Transcript of Market Structures MONOPOLY OLIGOPOLY MONOPOLISTIC COMPETITION Competitive Markets.
Market Structures
MONOPOLY
OLIGOPOLY
MONOPOLISTIC COMPETITION
Competitive Markets
What is a market structure?
• The way consumers and producers are organized in a market– Amount of firms?– Variety of goods?– Control over prices?– Barriers to entry?
How many firms are in the market?
Variety of goods
• How different are the goods in the market?
Control over prices
• How much control does a firm have over their prices?
Competitive Markets & the Profit Maximizing Firm
Chapter 14
What does this have to do with competition?
Do you think economists would consider this a competitive market?
What are competitive markets?• Two main conditions that must be met:–Many buyers and sellers–Goods offered are identical or largely the
same
• Also:–Firms can freely enter and exit the market
Economists sometimes call competitive markets perfect
competition. So, whether you hear a firm is in a competitive market or in a perfectly competitive market, it is the
same thing!
There are very few markets that compete perfectly
The market for wheat is a competitive market. This is because there are many buyers and sellers of wheat AND all
wheat is largely identical.
Most markets are not perfectly competitive, but very close.
The burger market is close to perfectly competitive because there are many buyers and sellers, but the product they sell is NOT identical. So, these firms are monopolistically competitive.
Monopolistic Competition
• Firms that produce differentiated products.– Products that are slightly different than one
another
We’ll talk more about monopolistic competition in chapter 17!
So which market do you think buyers have more control over price?
The perfectly competitive firm
If Joe the farmer sells wheat for $5 a bushel, then I’ll just
go buy wheat from Bob instead who sells it for $4 a bushel. What do I care? All wheat is the same so I just want the cheapest price!
Price Takers• Firms that are competing in a perfectly
competitive market are the “price takers.”• The firms have no control over price, so the
only thing they can control is how much they produce.
Nike has SOME control over the price of
sweaters because they can offer a slightly
different version than their competitors.
Joe the farmer has NO control over prices because
his wheat is exactly the same as his competitors. So if he
raises the price of his wheat, the customers will buy from
his competitors instead. Therefore, Joe the farmer is a
price taker.
Political Cartoon Contest• Think of a market that is monopolistically
competitive.• Draw a political cartoon of what that market
would look like if it was perfectly competitive.– Make it unique and eye catching– Creativity and humor definitely helps– Using popular figures also helps dramatically
• The top three will be chosen by the Social Studies Department
• Then, the residents of Econville will vote for the best cartoon in the class
Profit Maximization for competitive firms
Review: Key Concepts for Competitive Markets
• Market price = MR and AR• Profit maximization occurs where MR = MC• If MR > MC, the firm should increase output• If MR < MC, the firm should decrease output• The MC curve is also the firms supply curve– This is because the MC curve shows the quantity
supplied by the firm at any given price
The firms short run decision to shut down
What does shut down mean?• Shutting down is a short-run decision not to
produce anything for a specific period of time• When firms decide to close down forever and
leave the market, that is called an exit.
Most golf courses shut down in the winter.
In 2011, Borders exited the book market.
THE SUPPLY CURVE IN A COMPETITIVE MARKET
• Short-Run Supply Curve– The portion of its marginal cost curve that lies
above average variable cost.
• Long-Run Supply Curve– The marginal cost curve above the minimum point
of its average total cost curve.
MC
ATC
AVC
Costs
and
Revenue
Quantity
Short run supply curve starts here
Long run supply curve starts here
So when does a firm decide to shut down?
• Even if a firm does not make profit, there are instances where it is a rationale decision to stay open. Why?
• Because there are still fixed costs to pay!
Lets analyze a firm’s cost and revenue graph to understand the shut down
decision
Q3
P3
Optimal
Optimal
At what market price(s) will this firm have guaranteed profit?
P1 and P2
Q4
P4
Q3
P3
Optimal
Optimal
At what market price(s) will this firm have guaranteed losses?
P3 and P4
Q4
P4
Q3
P3
Optimal
Optimal
If market price was at P4, should the firm shut down?
NO!
Q4
P4
Q3
P3
Optimal
Optimal
At P4, the MR is greater than AVC. That means the quantity produced at P4 will cover all of the firm’s
variable costs plus some of its fixed costs.
So, this is better than shutting down and having to pay all of the firm’s fixed costs
Q4
P4
Q3
P3
Optimal
Optimal
If market price was P3, should the firm shut down?
Yes!
Q4
P4
Q3
P3
Optimal
Optimal
At P3, the MR is less than AVC. That means the quantity produced at P3 will not cover all of the
firm’s variable costs.
So, the firm won’t be able to cover its variable costs and even its fixed costs. Shut down!
Q4
P4
Review: Shut Down Key Concepts
• The short run supply curve is the portion of the MC curve that lies above AVC.
• The shut down decision only happens on the short run supply curve (short run decision)
• If MR > AVC, the firm does not shut down• If MR < AVC, the firm does shut down
sh
Q3
P3
Optimal
Optimal
Q4
P4
Questions?
The firms long run decision to exit the market
MC
ATC
Costs
Quantity
Long run supply curve starts here
Remember, the long run supply curve starts at the MC curve above the minimum point of ATC curve
So this is what a long run cost decision looks like (notice there is no AVC curve)
The rules of long run decisions
• When MR < ATC, the firm exits the market• When MR > ATC, new firms enter the market
MC
ATC
Costs
Quantity
P1
P2
P3
Q3Q2Q1
If market price was P1, the firm should exit the market because the revenue does not cover the total costs.
MC
ATC
Costs
Quantity
P1
P2
P3
Q3Q2Q1
If market price was P3, more firms will enter the market because the revenue not only covers the costs, but earns
profit for the firm.
MC
ATC
Costs
Quantity
P1
P2
P3
Q3Q2Q1
What would happen if market price was P2?
MC
ATC
Costs
Quantity
P1
P2
P3
Q3Q2Q1
If market price was P2, no firms would exit or enter the market. This is because profits in this market have been driven to zero.
Competitive Markets in the Long Run
How did the energy shot market go from this… TO THIS?
The Long Run: Market Supply with Entry and Exit
• Firms will enter or exit the market until profit is driven to zero.
• In the long run, price equals the minimum of average total cost.
• The long-run market supply curve is horizontal at this price.
So lets look at the long run energy shot market
The beginning days the energy shot
Firm(a) Initial Condition
Quantity (firm)0
Price
Market
Quantity (market)
Price
0
DDemand, 1
SShort-run supply, 1
P 1
ATC
Long-runsupplyP1
1Q
A
MC
The energy shot market began in long run equilibrium.
And the firms earned zero profit.
Teens start to get hooked on energy shots
Market Firm(b) Short-Run Response
Quantity (firm)0
Price
P 1
Quantity (market)
Long-runsupply
Price
0
D1
D2
P1
S 1
P 2
Q1
A
Q2
P2B
ATCMC
An increase in market demand…
…raises price and output.The higher P encourages firms to produce more…
…and generates short-run profit.
New firms enter the energy shot market
P 1
Firm(c) Long-Run Response
Quantity (firm)0
Price
MC ATC
Market
Quantity (market)
Price
0
P1
P2
Q1 Q2
Long-runsupply
B
D1
D2
S1
AS 2
Q3
C
Profits induce entry and market supply increases.
The increase in supply lowers market price. In the long run market price is restored, but market supply is greater.
We now have…