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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.