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Part Two: Market StructureLecture 1

Marketing (425 AEC)

Dr. Mahmoud Arafa

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This lecture focus on

Market Structure Identification.

Comparing Four Market Structures.

Characteristics Of Perfect CompetitionMarket.

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Market Structure The selling environmentin which a firm

produces and sells its product is called a

market structure.

Defined by three characteristics:

The number of firms in the market The ease of entry and exit of firms

The degree of product differentiation

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Market Structure Market structure identifies how a market

is made up in terms of:

The number of firms in the industry The nature of the product produced

The degree of monopoly power each firm has

The degree to which the firm can influence price

Profit levels

Firms behaviour pricing strategies, non-price competition,output levels

The extent of barriers to entry

The impact on efficiency

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Introduction

More competitive (fewer imperfections)

Perfect

CompetitionPure

Monopoly

Perfect competition, with an infinite number of firms, andmonopoly, with a single firm, are polar opposites (Q).

Monopolistic competition and oligopoly lie between thesetwo extremes.

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Market Structure

Perfect

Competition

Pure

Monopoly

Monopolistic Competition Oligopoly Duopoly Monopoly

The further right on the scale, the greater the degreeof monopoly power exercised by the firm.

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Market StructureCharacteristics: Look at these everyday products whattype of market structure are the producers of theseproducts operating in? (Just to think about)

Remember to thinkabout the nature of theproduct,entry and exit,behaviour of the firms,number and size of the

firms in the industry.You might even have toask what the industryis??

Canon SLR CameraBananas

Mercedes CLK Coupe

ElectricGuitarJazz Body

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Perfect Competition MonopolisticCompetition Oligopoly Monopoly

Number of Firms Very Many Many / Several Few One

Freedom of Entry Unrestricted Unrestricted Restricted Restricted orCompletely Blocked

Nature of Product Homogeneous Differentiated Undifferentiated orDifferentiated Unique

Implications of

Demand CurveHorizontal: Firm is a

price takerDownward Sloping

but Relatively Elastic

Downward Sloping.

Kinked Shape.

Relatively Inelastic.

(Shape depends on

rivals reactions)

Downward Sloping

More Inelastic Than

Oligopoly. Firm Has

Considerable Control

Over Price.

Comparing Market Structures

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Average Size ofFirms

Small and Large

(Economies of scalewill encourage

growth)Small and Large Large Small or Large

Possible

Consumer

DemandElastic

Elastic, Firms face

Individual Demand

curves

Consumer demands

factors

include advertising

and pricing from rivalfirms

Consumers are

limited to one choice

Profit Making

Possibility Normal Profits Normal ProfitsNormal and Economic

Profit(Depends on

reactions of price

setting by rivals)

Economies of Scale.

Normal and Economic

Profits in short and

Long Run

Comparing Market StructuresPerfect Competition Monopolistic

Competition Oligopoly Monopoly

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Comparing Market Structures

GovernmentIntervention Price Floors andCeilings Government MayLimit Entry Highly UnregulatedResulting in Cartels

Anti-Monopoly

Legislation. Profits

Taxes. Sales Taxes.

Price Setting.

Nationalization

EfficiencyProductively (P=Min

AC) and AllocativelyEfficient (P= MC)

Productively and

Allocatively Inefficient

Productively and

Allocatively

Inefficient.

Technological

Development May

Push Costs Down

Productively and

Allocatively Inefficient

Examples Corn, Onions,Broccoli

Gas Stations,

Convenience Stores,

Night Clubs

Cable, Phone and

Internet ProvidersPublic Transit,

Utilities

Perfect Competition MonopolisticCompetition Oligopoly Monopoly

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Perfect CompetitionA perfectly competitive market has

the following characteristics:

1. The product of any one seller is the same asthe product of any other seller. The price

then is , buyers do not carewhether they purchase the product from oneseller or another.

the same

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Perfect CompetitionA perfectly competitive market has

the following characteristics:

2. Each participant in the market, seller or buyer,to be so small , in relation to the entire market,

then he/she can not affects the product's price.But if all producers act together, changes in output will certainly affect the price. This mean thatthe firm's demand is horizont.al.

small

the product's price

Horizontal.

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Perfect Competition

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Perfect Competition

3. All Resources be completely mobile (enter orleave the market) and switch from one useto another. For example, Labor must be ableto move from region to region and from jobto job..

mobile

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Perfect Competition

4. consumer, firms, and suppliers have perfectinformation ofthe relevant economic andtechnological data.

consumer Aware of All prices

suppliers Aware of How much their resources will bring in all possibleuses

Firms Aware ofKnow the prices of all inputs and thecharacteristics of all relevant technologies.

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Perfect Competition

Having described these four requirements, it is

obvious that no industry is perfect competition.

Question: there are no industry is perfect

competition (Discuss). Mention the perfectcompetition market characteristics

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Profit-Maximizing Level of Output

The goal of the firm is to maximize profits.

Profit is the difference between

total revenue and total cost.

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Revenue of a Competitive Firm

Total revenue for a firm is the selling

price times the quantity sold.

TR = (PXQ)

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Revenue of a Competitive Firm

Marginal revenue is the change in total

revenue from an additional unit sold.

MR =TR/ Q

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Revenue of a Competitive Firm

For competitive firms, marginalrevenue equals the price of the

good.

MR = P

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Total, Average, and Marginal Revenue for a Competitive Firm

Quantity

(Q)

Price

(P)

Total Revenue

(TR=PxQ)

Average Revenue

(AR=TR/Q)

Marginal Revenue

(MR= )

1 $6.00 $6.00 $6.00

2 $6.00 $12.00 $6.00 $6.00

3 $6.00 $18.00 $6.00 $6.00

4 $6.00 $24.00 $6.00 $6.00

5 $6.00 $30.00 $6.00 $6.00

6 $6.00 $36.00 $6.00 $6.007 $6.00 $42.00 $6.00 $6.00

8 $6.00 $48.00 $6.00 $6.00

QTR /

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TC TR

0

T

otalcost,reven

ue

$385

350

315

280

245

210

175

140

105

70

35

Quantity1 2 3 4 5 6 7 8 9

Profit Determination Using Total Cost and Revenue Curves

Maximum profit =$81

$130

Loss

LossProfit

Profit =$45

/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Profit-Maximizing Level of Output

Marginal revenue(MR) the change intotal revenue associated with a change inquantity.

Marginal cost(MC) the change in totalcost associated with a change in quantity.

A firm maximizes profit when MC= MR.

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How to Maximize Profit

IfMRdoes not equal MC, a firm can

increase profit by changing output. TR/ Q TC/ Q

The supplier will continue to produce aslong as MC is less than MR.

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How to Maximize Profit

The supplier will cut back on

(Decreases) Production ifMCis greaterthan MR.

Thus, the profit-maximizing condition of acompetitive firm is MC = MR = P.

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Profit is maximizedwhen MR=MC.

If the cost ofproducing one moreunit is less than therevenue it generates,then a profit is

available for the firmthat increasesproduction by oneunit.

Profit Maximization: Using MR and MC curves

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If the cost ofproducing one more

unit is more than therevenue it generates,then increasingproduction reduces

profit.

Profit Maximization: Using MR and MC curves

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Question: Discuss using MC, MR, and outputcurves, that the profit-maximizingcondition of a competitive firm is MC

= MR = P.

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Profit Maximization By Numbers

Q P TR TC TR-TC MR MC ATC

0 $1 $0 $1.00 -$1.00 $1

1 $1 $1 $2.00 -$1.00 $1 $1.00 $2.00

2 $1 $2 $2.80 -$0.80 $1 $0.80 $1.40

3 $1 $3 $3.50 -$0.50 $1 $0.70 $1.17

4 $1 $4 $4.00 $0.00 $1 $0.50 $1.00

5 $1 $5 $4.50 $0.50 $1 $0.50 $0.90

6 $1 $6 $5.20 $0.80 $1 $0.70 $0.87

7 $1 $7 $6.00 $1.00 $1 $0.80 $0.86

8 $1 $8 $6.86 $1.14 $1 $0.86 $0.86

9 $1 $9 $7.86 $1.14 $1 $1.00 $0.87

10 $1 $10 $9.36 $0.64 $1 $1.50 $0.94

11 $1 $11 $12.00 -$1.00 $1 $2.64 $1.09

MR=MC

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The Marginal Cost Curve Is the Supply Curve

P, C P

Q FQ

M

a

b

c

d

A

B

q1q2q3q4 Q1 Q2

MC

P=MR0

ATC

P=MR1AVC

S1

S2

D0

$10

TC =$7

10 units

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MC, ATC, AVC curves

Q

0

Costs

and

Revenue MC

ATC

AVC

The marginal

cost curve is thefirm's supplycurve above the

point where priceexceeds averagevariable cost.

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Determining Profit and Loss

Q

0

Costs

and

Revenue

MC

P

Find output

where MC = MR (P).

The intersection ofMC= MR(P) determinesthe quantity the firm willproduce if it wishes tomaximize profits.

MR

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Determining Profit and Loss

Q

0

Costs

and

Revenue

MC

ATCMR = P2

Q2

Find profit

Drop a line down fromwhere MC equals MR,and then to the ATCcurve.

This is the profit per

unit.

Extend a line back tothe vertical axis toidentify total profit.

MR =P1

MR

Total Profit

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Determining Profit and Loss

The firm makes aprofit when the

ATC curve isbelow the MRcurve.

Inverse

The firm incurs aloss when the ATCcurve is above theMR curve.

Q0

Costs

and

Revenue MC

ATCMR = P2

Q2

MR =P1

MR

Total Profit

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Zero profit

Zero profit or loss where MC=MR.

Firms can earn zero profit or even a loss where MC =MR.

Remember that:

Profit = TR - TC Profit per unit = MR - MC

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Determining Profit and Loss

From a Table of Costs

Profit can be calculated from a table ofcosts and revenues.

Profit is determined by total revenueminus total cost.

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P = MR Output Total CostMarginal

CostAverageTotal Cost

TotalRevenue

ProfitTR-TC

0 40.00 0 40.00

35.00 1 68.00 28.00 68.00 35.00 33.00

35.00 2 88.00 20.00 44.00 70.00 18.00

35.00 3 104.00 16.00 34.67 105.00 1.00

35.00 4 118.00 14.00 29.50 140.00 22.0035.00 5 130.00 12.00 26.00 175.00 45.00

35.00 6 147.00 17.00 24.50 210.00 63.00

Costs Relevant to a Firm

McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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P = MR Output Total CostMarginal

Cost

Average

Total Cost

Total

Revenue

Profit

TR-TC

35.00 4 118.00 14.00 29.50 140.00 22.00

35.00 5 130.00 12.00 26.00 175.00 45.00

35.00 6 147.00 17.00 24.50 210.00 63.00

35.00 7 169.00 22.00 24.14 245.00 76.00

35.00 8 199.00 30.00 24.88 280.00 81.0035.00 9 239.00 40.00 26.56 315.00 76.00

35.00 10 293.00 54.00 29.30 350.00 57.00

Costs Relevant to a Firm

McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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(a) Profit case (b) Zero profit case (c) Loss case

Determining Profit and Loss From a Graph

Quantity Quantity Quantity

Price

6560

55504540353025201510

50

6560

55504540353025201510

50

1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12

D

MC

A P = MR

B ATC

AVC

E

Profit

C

MC

ATC

AVC

MC

ATC

AVC

Loss

6560

55504540353025201510

50

1 2 3 4 5 6 7 8 910 12

P = MR

P = MR

Price Price

The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill

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MC

P = MR

2 4 6 8 Quantity

Price

60

50

40

30

20

10

0

ATC

AVC

Loss

The Firm's Shutdown DecisionThe shutdown pointis the point below which

the firm will be better offif it shuts down than itwill if it stays inbusiness

Shut down ifTR < TVCShut down ifMR < MC

Shut down ifP < ATC

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The Firms Decision to Enter a Market

A firm will enter the industry if such an actionwould be profitable.

TR > TVCMR > MC

P > ATC

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