Principles of Microeconomics - Overview Market Structures
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Transcript of Principles of Microeconomics - Overview Market Structures
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Market Structures: Introduction
Dr. Katherine Sauer
Principles of Microeconomics
ECO 2020
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Overview:
I. Types of Market Structures
II. Price and Competition
III. Recap of Firms Profits
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Rule:
if P < AVC then temporarily shut down
if P > AVC then produce the quantity where MR = MC
A firmsproduction decisions depend on
production costs
products price
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Comparingprice to average total cost determines a
firmsprofits.
if P < ATC the firm earns a loss
if P = ATC the firm breaks even
if P > ATC the firm earns a profit
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Theprice that a firm can charge depends on
- what kind of product it produces
- how much competition it faces
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I. There are 4 basic types of markets:
1. Competitive
2. Monopoly
3. Monopolistic Competition
4. Oligopoly
We will characterize each type of market according to the
following factors:
- number of firms
- type of product
- barriers to entry
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1. Competitive Market Characteristics
(aka Perfect Competition)
many firms (none of them dominate the market)
products are roughly the same (aka homogeneous)
no barriers to entry (new firms can easily enter this
market)
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Ex: rice farmers in east Asia
- many, many rice farmers
- one farmers rice isnt distinguishable from another
farmers rice
- no significant barriers to starting a rice-growing
business
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2. Monopoly Market Characteristics
one firm
uniqueproduct (could simply be geographically
unique or something without close substitutes)
complete barriers to entry (other firms are preventedfrom entering this market)
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The fundamental cause of a monopoly isbarriers to entry.
a. sole ownership or control of a key resource that is usedin the production of the good
e.g. DeBeers diamonds
b.patents = government grants an exclusive right to sellsome good or service
e.g. Lipitor (exp 11/2011)
c. natural monopoly = due to economies of scale, a singlefirm can supply a good or service to an entire market at a
smaller cost than could two or more firms
e.g. one water company per city
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3. Monopolistic Competition Characteristics
many firms
differentiatedproduct (advertising is important)
no barriers to entry
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This is an industry where there is substantial competition
for the good itself, but firms differentiate their product bybranding.
Ex: blue jeans
- no real barriers to entry to produce- hundreds of firms produce blue jeans
- the GAP has a monopoly on GAP brand jeans
- Levis has a monopoly on Levis brand jeans
competition on the item, monopoly on the brand
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4. Oligopoly Market Characteristics
few firms (more than 1, less than many)
identical or differentiated products
high barriers to entry
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Ex: automobile makers for the US: GM, Ford, Toyota,Volkswagon, Hyundai, Nissan, Honda, Chrysler
- sell similar but differentiated products
Toyota Corolla vs Nissan SentraChevy Blazer vs GMC Jimmy
- high barriers to entry
(the start up capital would be huge factories,engineers, supply chain)
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Ex: Oil Industry
- dominated by a few firms: ExxonMobil, Royal Dutch
Shell, BP, Chevron and ConocoPhillips
- sell a homogeneous product
- high barriers to entry: start up capital, mineral rights
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Ranking the types of markets from most competitive to
least competitive:
Most
Competition
Least
Competition
Competitive
Market
Monopoly
Market
Monopolistic
Competition
Market
Oligopoly
Market
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II. Competition and Prices
When it comes to setting price:
A firm in a competitive market must simply accept the
market price as given.
- many, many other firms
- selling the same product
- new firms can enter at will
A firm in this type of market is a price taker.
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A monopolistic competitorcan determine what price to
charge for their good, but they keep in mind:
- face competition from similar products
- consumers willingness to pay
Ex: Dove can set the price for its body wash but it
cant control the price for body wash in general.
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In an oligopoly market, the ability to set price dependson the type of goodbeing sold.
ex: oil has one price
ex: car makers can set prices for different models
Because there are only a few firms in an oligopolymarket, strategy is incredibly important.
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A monopolist can determine what price to charge for its
good because it faces no competition.
price maker price setter
A monopolist, however, cant set the price infinitely high.
- can only set it as high as demand will allow
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The level of competition would suggest to us that the typeofmarket structure would impact price elasticity of
demand.
A firm in a competitive market will have more elasticdemand than a monopoly market.
D, competitive > D, monopoly
- many close substitutes in competitive market
- no substitutes in monopoly market
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A firm in a monopolistic competition market is likely to
face a more elastic demand curve than a monopoly anda more inelastic curve than perfect competition.
D, competitive > D, mono comp > D, monopoly
- advertising will make peoples demand more inelastic
(brand loyalty) than a competitive market
- availability ofsubstitutes will make peoples demand
more elastic than for a monopoly good.
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Price elasticity of demand for an oligopoly good depends
on the good.
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III. Recap of Firms Profits
A. Costs
Average Total Cost
Marginal
Cost
cost per
input
output
Average Variable Cost
TC = TFC + TVC
ATC = AFC + AVC
ATC = TC / Q
AFC = TFC / Q
AVC = TVC / Q
MC = change in TC
change in Q
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B. Revenue
TR = P x Q
MR = change in TR
change in Q
Average Revenue = TR / Q
= P x Q / Q
= P
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C. Shut Down and Break Even
If P < AVC, then temporarily shut down.
loss equal to fixed cost
If P > AVC, the produce the quantity where MR = MC.
If P < ATC, earn a loss. (exit in the long run)
If P = ATC, break even.
If P > ATC, earn a profit. (firms will enter if thereare no barriers)
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We would expect that firms in competitive andmonopolistically competitive market wouldbreak even
in the long run.
We would expect that firms in oligopoly or monopolymarket would earnpositive profits in the long run.
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D. Firms Supply
An individual firms short run supply curve is the portion
of the MC curve that is above the AVC curve.
An individual firms long run supply curve is the portion of
the MC curve that is above the ATC curve.