I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) Monopoly
Market Structure
Market Structure
Models – a word of warning!- Market structure deals with a number of economic
‘models’- These models are a representation of reality to
help us to understand what may be happening in real life
- There are extremes to the model that are unlikely to occur in reality
- They still have value as they enable us to draw comparisons and contrasts with what is observed in reality 比较和对比什么是现实
- Models help therefore in analysing and evaluating – they offer a benchmark基准
- Even with these warnings, they do help describe important concerns that you deal with everyday you interact in any economic way:
-Degree of competition affects the consumer will it benefit the consumer or not?
- Impacts on the performance and behaviour of the company/companies involved.
Market Structure
We will start with the structure that my vegetable
lady works in…
I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) Monopoly
Market Structure
Profit = Total revenue – Total cost
the amount a firm receives from the sale of its output
the market value of the inputs a firm uses in production
What is the goal of business?We assume that the firm’s goal is to maximize profit.
But first we have to finish this, I didn’t do the revenue side
yet…
Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product(MP) Marginal Product(AP) Average Product
Economic Profit
Accountant Profit
Explicit Costs Implicit Costs
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
1.)Depreciation
2.) Normal Profit
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
(TR) Total Revenue(MR) Marginal Revenue(AR) Average Revenue
Defining Revenue
(TR) Total Revenue TR = P x Q
Remember elasticity – the square area that shows the total amount received from a price and quantity.
P
Q
D
50
8
B
30
12
A
Demand for coffee Point A
30 x 12 = 360
Point B
50 x 8 = 400
Example Total Revenue Test
Remember P x Q with elasticities?
(MR) Marginal Revenue
Defining Revenue
(TR) Total revenue TR = P x Q
∆TR∆Q
MR =
TRQ
AR =
The change of the very last one sold from the next. Is the best way to find out efficiency.
(AR) Average Revenue
(MR) Marginal Revenue
Defining Revenue
(TR) Total revenue TR = P x Q
∆TR∆Q
MR =
TRQ
AR =
Average of each unit, this will also will equal the price in a market
Profit = Total revenue – Total cost
What is the goal of business?We assume that the firm’s goal is to maximize profit.
We assume that the firm’s goal is to maximize profit.
Profit = Total revenue – Total cost
What is the goal of business?We assume that the firm’s goal is to maximize profit.
We assume that the firm’s goal is to maximize profit.
So a summary of all of it now real quick…
Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product(MP) Marginal Product(AP) Average Product
Economic Profit
Accountant Profit
Explicit Costs Implicit Costs
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
1.)Depreciation
2.) Normal Profit
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
(TR) Total Revenue(MR) Marginal Revenue(AR) Average Revenue
When marginal product exceedsaverage product, average product is increasing.
When marginal product is less than average product, average product is decreasing.
When marginal product equalsaverage product, average product is at its maximum.
Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product(MP) Marginal Product(AP) Average Product
Economic Profit
Accountant Profit
Explicit Costs Implicit Costs
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
1.)Depreciation
2.) Normal Profit
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
(TR) Total Revenue(MR) Marginal Revenue(AR) Average Revenue
(TC) Total Cost
(TFC) Total Fixed Cost
(TVC) Total Variable Cost
+
=
The (MC) marginal cost curve is U-shaped and intersects the (AVC) average variable cost curve and the (ATC) average total cost curve at their minimum points.
A firm’s average variable cost curve is linked to its average product curve.
If (AP) average product rises, (AVC) average variable cost falls.
If (AP) average product is a maximum, (AVC) average variable cost is a minimum.
Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product(MP) Marginal Product(AP) Average Product
Economic Profit
Accountant Profit
Explicit Costs Implicit Costs
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
1.)Depreciation
2.) Normal Profit
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
(TR) Total Revenue(MR) Marginal Revenue(AR) Average Revenue
Economies of scale as output increases to 9 gallons an hour
constant returns to scale for outputs between 9 gallons and 12 gallons an hour.
and diseconomies of scale for outputs that exceed 12 gallons an hour.
Profit = Total revenue – Total cost
What is the goal of business?We assume that the firm’s goal is to maximize profit.
We assume that the firm’s goal is to maximize profit.
The next two vocabulary parts are the super important ones to
note on every graph.
(MR) Marginal Revenue
Profit Maximization
∆TR∆Q
Profit-Maximizing Output: level at which (MR) marginal revenue equals (MC) marginal cost
MR = MC
We assume all firms are profit maximizing, producing at the point where their profits are at their highest
(MC) Marginal Cost ∆TC
∆Q
Profit Maximization
Profit-Maximizing Output: level at which (MR) marginal revenue equals (MC) marginal cost
MR = MC
We assume all firms are profit maximizing, producing at the point where their profits are at their highest
If increase Q by one unit,revenue rises (or fall) by MR,cost rises by MC.
If MR > MC, then increase Q to raise profit. If MR < MC, then reduce Q to raise profit.
Profit-Maximizing LevelWhere marginal revenue equals
marginal cost
MR = MC
Cost-Minimizing Level Where marginal costs equals lowest point
on average total cost curve
MC = ATC
Profit Maximization
Profit-Maximizing LevelWhere marginal revenue equals
marginal cost
MR = MC
Cost-Minimizing Level Where marginal costs equals lowest point
on average total cost curve
MC = ATC
Profit Maximization
Step 1 on every graph is this point
Profit-Maximizing LevelWhere marginal revenue equals
marginal cost
MR = MC
Cost-Minimizing Level Where marginal costs equals lowest point
on average total cost curve
MC = ATC
Profit Maximization
Step 2 on every graph is this point
I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) Monopoly
Four Market Types
Market Structure
Quick summary and comparison…
I.) Perfect competition
Market Structure
Easy to enter/exit market
More competitive
Goods are very similar
Efficient allocation
II.) Monopolistic competition
Market Structure
Easy to enter/exit market
Competitive
Goods are different
Not very efficient allocation
III.) Oligopoly
Market Structure
Hard to enter/exit market
Competitive
Goods are similar
Not efficient allocation
IV.) Monopoly
Market Structure
Hard to enter/exit market
Not competitive
Only one seller
Not efficient allocation
Market StructureMore competitive (fewer imperfections)
Perfect Competition
Pure Monopoly
Market Structure
Perfect Competition
Pure Monopoly
Less competitive (greater degree of imperfection)
Market Structure
Perfect Competition
Pure Monopoly
The further right on the scale, the greater the degree of monopoly power exercised by the firm.
Monopolistic Competition Oligopoly Duopoly Monopoly
Market Types
I.) perfect competition
Ok, finally…
Characteristic Perfect Competition
Monopolistic Competition
Oligopoly Monopoly
Substitution ofProduct sold
Barriers to entry into market
Pricing vs MC and MR
Efficiency
# of sellers
Characteristic Perfect Competition
Monopolistic Competition
Oligopoly Monopoly
Substitution ofProduct sold
Barriers to entry into market
Pricing vs MC and MR
Efficiency
# of sellers
A summary of the notes for each type.
Characteristic Perfect Competition
Monopolistic Competition
Oligopoly Monopoly
Substitution ofProduct sold
Barriers to entry into market
Pricing vs MC and MR
Efficiency
# of sellersMany
(price takers)
Only one product type from all
sellers
No barriers to enter/ exit
P =MC=MR
Efficient with zeroecon profit
P = ATC
I.) Perfect Competition-Many firms sell an identical product to many buyers.
She sells the same as everyone else and there
are lots of sellers
Like my vegetable Like my vegetable lady…lady…
I.) Perfect Competition-Many firms sell an identical product to many buyers.
-There are no restrictions on entry into (or exit from) the market.
-Established firms have no advantage over new firms.
-Sellers and buyers are well informed about prices
Price Taker - is a firm that cannot influence the price of the good or service that it produces.
I.) Perfect Competition
Price Taker
(More on Price Taker…)
So, each one-unit increase in Q causes revenue to rise by P, so MR = P.
A competitive firm can keep increasing its output without affecting the market price.
MR = P for a Competitive Firm and is a perfectly elastic line
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$102
$10$101
n/a$100
TRPQ MRAR
$10
I.) Perfect Competition
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$10
$10
$10
$10$102
$10$101
n/a
$30
$20
$10
$0$100
TR = P x QPQ∆TR
∆QMR =
TR
QAR =
$10
$10
$10
$10
$10
I.) Perfect Competition
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$10
$10
$10
$10$102
$10$101
n/a
$30
$20
$10
$0$100
TR = P x QPQ∆TR
∆QMR =
TR
QAR =
$10
$10
$10
$10
$10
Notice that MR = P
Notice that MR = P
I.) Perfect Competition
Market TypesI.) perfect competition
I have created a large number of graphs here, however the transitions in the PPT make it easier to
follow, I recommend to download the other version of the PPT to follow since I can’t make transitions here
in this version of the PPT.
P
Q
P
S
D
QQ1
P1
This is the Demand and Supply Lines of the whole market
P
This line ends up being the only price they can charge
= MR
Which is also their marginal revenue on each unit
= D=AR
And the average revenue
So this is the demand curve for the single firm in the market
I.) Perfect Competition
(MR) Marginal Revenue
Profit Maximization
∆TR∆Q
Profit-Maximizing Output: level at which (MR) marginal revenue equals (MC) marginal cost
MR = MC
We assume all firms are profit maximizing, producing at the point where their profits are at their highest
(MC) Marginal Cost
∆TC∆Q
Step 1, find this Step 1, find this point!point!
505
404
303
202
101
$00
∆Profit = MR – MC
MCMRProfitTCTRQAt any Q with
MR > MC,increasing Q raises
profit.
10
10
10
10
$10
(continued from earlier table)
At any Q with
MR < MC,reducing Q raises
profit.
Profit Maximization
First – What is MC?
505
404
303
202
101
$00
∆Profit = MR – MC
MCMRProfitTCTRQAt any Q with
MR > MC,increasing Q raises
profit.
10
10
10
10
$10
(continued from earlier table)
At any Q with
MR < MC,reducing Q raises
profit.
Profit Maximization
First – What is MC?
Second – What is Profit?
505
404
303
202
101
$00
∆Profit = MR – MC
MCMRProfitTCTRQAt any Q with
MR > MC,increasing Q raises
profit.
10
10
10
10
$10
(continued from earlier table)
At any Q with
MR < MC,reducing Q raises
profit.
Profit Maximization
First – What is MC?
Second – What is Profit?
Third – What is Profit Max point?
P=MR=AR=D
I.) Perfect Competition
Q
P
the MC curve is the Supply curve for the single firm in the market
MC
Rule: MR = MC is the profit-maximizing point
Q1Q2 Q3
= S
At any Q with
MR > MC,increasing Q raises
profit. At any Q with
MR < MC,reducing Q raises
profit.
P
Q
I.) Perfect Competition S
D
QQ1
P1
This is the Demand and Supply Lines of the whole market
P
So this is the Supply and Demand curves for the single firm in a perfectly competitive market
MC = S
Except for this big issue
This is not the only cost curve a firm faces we must add the others to truly determine the supply curve which also effect other decisions
P = MR = D=AR
Short Run Costs
(AVC) Average Variable Cost
(AFC) Average Fixed Cost
(ATC) Average Total Cost
will determine profits in the short and long run.
Will determine when a firm shuts down in the short run and exits the market in the long run.
Don’t care very much about this one
I.) Perfect Competition Cost Curves
Q
P
*** Any price below ATC is losing money and will effect decisions to shut down and exit the market in the long run
MC
Rule: MC = ATC is the cost minimizing point
Q1
ATC
Profit-Maximizing Level
Where marginal revenue equals marginal cost
MR = MC
Cost-Minimizing Where marginal costs equals lowest point
on average total cost curve
MC = ATC
Putting it all together…
I will start at the easiest graph and go the harder graphs, but this means I will have to do things a little bit out of order
Decisions are different in the long run and the short run and I will start with the long run first since it is the easiest graph and the graph that all the other ones are moving towards anyway.
P
Q
S
D
QQ1
P1
Market D + S
P
PC Firm Long Run Equilibrium
MC
This point is a normal profit ( = zero economic profit)- other firms won’t want to enter the market because there is no economic (abnormal ) profits- Output is productively and allocatively efficient
ATC
P=MR =AR =D
I.) Perfect Competition Long Run
Q1
P
Q
S
D
QQ1
P1
If price increases for any reason
P
PC Firm Short Run making profit
MC
A firm can make economic (abnormal) profit in the short run
ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D1
Q2
P2
Price is above long run equilibrium of normal profits
I.) Perfect Competition Short Run
Q
P MC
Q1 Q2
ATC
P=MR =AR =D
So a zoomed in version of the
graph…
I.) Perfect Competition Short Run
Q
P MC
Q1 Q2
ATC
Profit-Maximizing
Where marginal revenue equals marginal cost
MR = MC P=MR =AR =D
Step 1Step 1
I.) Perfect Competition Short Run
Q
P MC
Q1 Q2
ATC
Profit-Maximizing
Where marginal revenue equals marginal cost
MR = MC
Point at which Q equals ATC
P=MR =AR =D
Cost
Step 2Step 2
I.) Perfect Competition Short Run
Q
P MC
Q1 Q2
ATC
Profit-Maximizing
Where marginal revenue equals marginal cost
MR = MC
Point at which Q equals ATC
P=MR =AR =D
Cost
Difference between AR and ATC
Profit Amount
Step 3Step 3
P
Q
S
QQ2
If price increases for any reason
P
PC Firm Short Run making profit
MC
Since there are low barriers to enter the market, firms will see there is a profit to be made and so more firms will enter the market
ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q2
P2
P
Q
S
QQ1
P1
PMC
ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q1
P2
S1
Q2 Q2
Since there are low barriers to enter the market, firms will see there is a profit to be made and so more firms will enter the market
This will increase the supply and lower the price until it reaches long run equilibrium again and all abnormal profits will be gone
P
Q
S
D
QQ1
P1
Market D + S
P
PC Firm Long Run Equilibrium
MC
This point is a normal profit ( = zero economic profit)- other firms won’t want to enter the market because there is no economic (abnormal ) profits- Output is productively and allocatively efficient
ATC
P=MR =AR =D
I.) Perfect Competition Long Run
P
Q
S
D
QQ1
P1
If price decreases for any reason
P
PC Firm Short Run losing money
MC
A firm will be losing money because the price they can get is below the costs they have at every point they can produce
ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D1
Q2
P2
I.) Perfect Competition Short Run
Q
P MC
Q2
ATC
P=MR =AR =D
So a zoomed in version of the
graph…
I.) Perfect Competition Short Run
Q
P MC
Q2
ATC
Profit-Maximizing
level at which (MR) marginal revenue equals (MC) marginal cost
MR = MCP=MR =AR =D
Step 1Step 1
I.) Perfect Competition Short Run
Q
P MC
Q2
ATC
Profit-Maximizing
level at which (MR) marginal revenue equals (MC) marginal cost
MR = MC
Point at which Q equals ATC
P=MR =AR =D
Cost
Step 2Step 2
I.) Perfect Competition Short Run
Q
P MC
Q2
ATC
Profit-Maximizing
level at which (MR) marginal revenue equals (MC) marginal cost
MR = MC
Point at which Q equals ATC
P=MR =AR =D
Cost
Difference between AR and ATC
Loss Amount
Step 3Step 3
P
Q QQ2
P
PC Firm Short Run losing money
MC ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q2
P2
Since there are low barriers to exit the market and a firm is losing money at the price that it can get, a firm will leave the market.
S
P
Q
S
QQ1
P1
Firms leave the market
P
PC Firm Short Run losing money
MC ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q2
S1
Since there are low barriers to exit the market and a firm is losing money at the price that it can get, a firm will leave the market.
Enough firms leave will cause the supply line to shift left as there is less
Q1 Q2
P2
P
Q Q
Market D + S
P
PC Firm Long Run Equilibrium
MC
This point is a normal profit ( = zero economic profit)- other firms won’t want to enter the market because there is no economic (abnormal ) profits- Output is productively and allocatively efficient
ATC
P=MR =AR =D
I.) Perfect Competition Long Run
P1
D
S
Q1
The decision to shut down
point where a firm shuts down but is only a temporary situation.
point where a firm shuts down and is a permanent situation.
Long Run Short Run
A firm is still going to have fixed costs ( TFC )
Costs are zero, they have left the market
Shut down = revenue loss = TR Exit = revenue loss = TR
Shut down = cost savings = VC
Shut down if TR < VC
Shut down if P < AVC
Exit = cost savings = TC
Exit if TR < TC
Exit if P < ATC
P
Q
S
D
QQ1
P1
Market D + S
P
PC Firm exit situation
MC
If price is permanently below ATC the firm will never be able to make a profit so they will stay out of the market
ATC
P=MR =AR =D
I.) Long Run Exit the Market
Exit if P < ATC
P
Q
S
D
QQ1
P1
Market D + S
P
PC Firm shutdown situation
MC
If price is below AVC there is no output that would be profitable, a firm can minimize their losses by not producing
If the price is above AVC at least some of those costs are covered by producing and would only be losing on some or all of the fixed costs
ATC
P=MR =AR =D
I.) Short Run Shut down point
Shutdown if P < AVC
AVC
P
Q QQ1
P1
PMC
ATC
P=MR =AR =D
Long Run ExitShort Run Shutdown MC ATC
P=MR =AR =D
AVC
A firm is still going to have fixed costs ( TFC )
Costs are zero, they have left the market
Shut down = revenue loss = TR Exit = revenue loss = TR
Shut down = cost savings = VC
Shut down if TR < VC
Shut down if P < AVC
Exit = cost savings = TC
Exit if TR < TC
Exit if P < ATC
P
Q
S
QQ1
P1
PMC
ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q2Q1
A new technology lowers cost for a firm and allows them to make a larger profit
P
Q
S
QQ1
P1
P
PC Firm Short Run making profit
MC
ATC
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q2
ATC1
MC1
A new technology lowers cost for a firm and allows them to make a larger profit
Q1
P
Q
S
QQ1
P1
P
PC Firm Short Run making profit
P=MR =AR =D
I.) Perfect Competition Short Run
D
Q2
P2
ATC1
MC1
S1
A new technology lowers cost for a firm and allows them to make a larger profit
Since there are low barriers to enter the market, firms will see there is a profit to be made and so more firms will enter the market
Q1
P
Q QQ1
P
P=MR =AR =D
I.) Perfect Competition Long Run
D
Q2
S1
P2P=MR =AR =D
ATC1
MC1
Market D + S PC Firm Long Run Equilibrium
This point is a normal profit ( = zero economic profit)- other firms won’t want to enter the market because there is no economic (abnormal ) profits- Output is productively and allocatively efficient
P
Q
S
D
QQ1
P1
Market D + S
P
Perfectly Competitive Firm
MC
MB = MC = max efficientMC = SMB = D
ATC
P=MR =AR =D
I.) Perfect Competition Welfare Analysis
MC = SMB = D = PP = MC = total
surplus is maximized
P
Q Q
Abnormal profit - YES
Productively - NOEfficient (Q = min ATC ) Allocatively - YESEfficient ( P = MC )
PMC
ATC
P=MR =AR =D
Long Run Short Run MC
ATC
P=MR =AR =D
Abnormal profit - NO
Productively - YESEfficient (Q = min ATC ) Allocatively - YESEfficient ( P = MC )
I.) Perfect competition
Market Structure
So to summarize…
I.) Perfect competition
Market Structure
Easy to enter/exit market
More competitive
Goods are very similar
Efficient allocation
Characteristic Perfect Competition
Monopolistic Competition
Oligopoly Monopoly
Substitution ofProduct sold
Barriers to entry into market
Pricing vs MC and MR
Efficiency
# of sellersMany
(price takers)
Only one product type from all
sellers
No barriers to enter/ exit
P =MC=MR
Efficient with zeroecon profit
P = ATC
The End Thank you
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