Chapter 13 – Competition in Markets
ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Patrick J. Welch
&
St. Louis University
Gerry F. Welch
St. Louis Community College
at Meramec
PowerPoint Presentation by:
Dr. Ray Everett
Pima Community College
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.
Competition and Market Structures
Contents
Defining a Market
Market Structures
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Market Structures & Efficiency
Maximizing Profit (Chapter 13 Appendix)
Competition and Market Structures
Chapter Objectives
• To define a market and explain how its boundaries are determined.
• To explain how a firm’s pricing and profit behavior are related to the
amount of competition it faces in the market.
• To give the basic characteristics of the four market structures: pure
competition, monopolistic competition, oligopoly, monopoly.
• To describe an individual firm’s demand curve, pricing behavior, and
nonprice competitive behavior in each of the four market structures.
• To explain how a firm’s long-run pricing and profit behavior and the
degree of efficiency it achieves are affected by the amount of
competition it faces in a market.
• To evaluate how consumers fare and how efficiency is achieved with
firms in each of the four market structures.
• To develop (in an appendix) the explanation of how a firm determines
its profit-maximizing price and output level.
Defining a Market
• Market Structures
 System for grouping and analyzing markets according to
the degree and type of competition among sellers.
• Industry
 Group of firms producing similar products or using similar
processes.
• Market
 Includes firms that produce similar products or use
similar products, or use similar processes, and compete
for the same buyers.
• Geographic Boundary of a Market
 Defined by the geographic area in which sellers and
buyers compete.
• Product Boundary of a Market
 Defined by product substitutability among buyers.
13-1
Market Structures
• Factors Affecting a Market Model
 Number of sellers
• Important to the amount of competition in a market.
 Product type
• Can be identical from seller to seller or be different.
• If a firm can distinguish its product from those of its
competitors, then nonprice competition can arise.
 Entry and exit
• The ease with which a firm may enter or leave a market.
13-2
Pure Competition
• Characteristics
 Large number of independent sellers.
 Identical products are offered for sale.
 Easy entry into and exit from the market.
• Control Over Price
 Price Takers
• Sellers with no control over the price of their products.
– Market demand and market supply determine the
equilibrium price and quantity of a product.
13-3a
Pure Competition
• Market Demand Curve
 Demand curve for all buyers in the market together.
• Individual Firm’s Demand Curve
 Amounts of an individual firm’s product that buyers are
willing to purchase at particular prices.
FIGURE 13-2
Demand Curve for the Output of a Purely Competitive Seller
13-3b
Pure Competition
• Effect of an Increase in Market Demand
 Equilibrium price will increase.
 Individual firm’s demand curve shifts upward.
FIGURE 13-3
Effect on the Individual Firm of an Increase in Market Demand
13-3c
Pure Competition
• Economic Profit, Loss, or Breaking Even
 Occurs when price is greater than, less than, or equal to
average total cost, respectively.
• Nonprice Competition
 Firms focus on a feature other than price to attract
buyers to their products.
 Does not occur in purely competitive markets.
FIGURE 13-4
A Purely Competitive Seller Operating with an Economic Profit, a
Loss, or Breaking Even
13-3d
Pure Competition
• Long-Run Position
 Cost of production is as low as it can possibly be.
 Price of the product is as low as it can possibly be.
 Consumer pays no economic profit.
FIGURE 13-5
Long-Run Position of a Purely Competitive Seller
13-3e
Pure Competition
• Effect of Entry & Exit
 Entry
• Firms are attracted to a market when economic profit is
being made by individual firms in that market.
• Causes the market supply to increase and the equilibrium
price to fall.
 Exit
• Firms drop out of a market in the long run when others
begin to operate at a loss.
• Causes the market supply to decrease and the equilibrium
price to rise.
13-3f
Pure Competition
• Effect of Entry & Exit (cont.)
FIGURE 13-6
Effect of Entry of Sellers into a Purely Competitive Market
FIGURE 13-7
Effect of Exit of Sellers from a Purely Competitive Market
13-3g
Pure Competition
• Purely Competitive Market Examples
13-3h
Pure Competition
• Purely Competitive Market Examples (cont.)
13-3i
Monopolistic Competition
• Characteristics
 Large number of sellers, but not as many as in pure
competition.
 Differentiated products.
 Fairly easy entry into and exit from the market.
• Control Over Price
 Due to the differentiated products, a seller may raise the
price of a product and lose only some, but not all, of its
buyers.
• Buyers do not view the product of one seller as a perfect
substitute for the product of another, and this allows the
seller to increase prices.
13-4a
Monopolistic Competition
• Individual Firm’s Demand Curve
 Downward-sloping due to product differentiation.
FIGURE 13-8
Demand Curve for the Output of a Monopolistically Competitive Seller
13-4b
Monopolistic Competition
• Pricing, Profit, and Loss
 Can be determined by comparing the demand curve and
average total cost curve for a product listed by a seller.
• Nonprice Competition
 Due to differentiation, nonprice competition can occur
through:
• Packaging, parking, facility ambience, service, location,
quality, selection, guarantees, etc.
FIGURE 13-9
A Monopolistically Competitive Seller Operating with an Economic Profit or a Loss
13-4c
Monopolistic Competition
• Long-Run Position
 Earns a normal profit.
 Unlike pure competition, does not operate at minimum
average cost.
 Efficiency is sacrificed for product differentiation.
FIGURE 13-10
Long-Run Position of a Monopolistically Competitive Seller
13-4d
Oligopoly
• Characteristics
 Market is dominated by a few large sellers.
 Products may be differentiated or identical.
 Entry into the market is quite difficult.
• Control Over Price
 Mutual Independence
• So few sellers exist in the market that each seller weighs
the actions and reactions of rivals in decision making.
13-5a
Oligopoly
• Individual Firm’s Product Price
 Leadership Pricing
• One firm in a market sets a price that the other firms in the
market then adopt.
 Kinked Demand Curve
• Assumes that rivals will not follow price decreases.
– As a seller’s price rises, the amount of its product
demanded decreases substantially, but as its price falls,
the amount demanded increases only slightly.
13-5b
Oligopoly
• Nonprice Competition
 Depends on whether the products are identical or
differentiated.
• Long-Run Position
 Earns an economic profit.
• Item price can be greater than its actual cost.
 Inefficiency may occur due to restricted entry into the
market.
13-5c
Monopoly
• Characteristics
 Only one seller.
 No need to consider the issue of product differentiation.
 No possibility of entry by new sellers.
• Monopolistic Examples
 Public utilities
• Regulatory agencies may deny permission for new sellers
to enter the market.
 Ownership of a patent
• Patent may cover a wide range of manufacturing
processes.
 Sole owner of a factor necessary for production
• Cartels
 Arrangement made whereby sellers formally join together
in a market to make decision as a group on matters such
as pricing.
13-6a
Monopoly
• Control Over Price
 More control over its price than does a firm in any other
market.
 Its demand curve is the market demand curve.
• Demand for a Monopolist’s Product
 Price Searcher
• A firm that searches its downward-sloping demand curve to
find the price-output combination that maximizes its profit.
13-6b
Monopoly
• Demand for a Monopolist’s Product (cont.)
13-6c
Monopoly
• Demand for a Monopolist’s Product (cont.)
13-6d
Monopoly
• Nonprice Competition
 Advertising and other nonprice competition may be
designed to make people aware of the good or service
itself, not the seller.
• Long-Run Position
 Earns an economic profit.
• May be monitored or controlled by a regulatory agency.
 Inefficiency may occur due to restricted entry into the
market.
13-6e
Market Structures & Efficiency
• Market Structure Overview
 Pure Competition
• Buyers fare best in this market.
• In the long run, price is equal to the average total cost.
 Monopolistic Competition
• In the long run, price is equal to the average total cost.
– This is not the lowest possible level due to the
downwards-sloping demand curve.
• Greater inefficiency.
 Oligopoly & Monopoly
• In the long run, the price of a product can remain above its
average total cost.
• Possible inefficiency.
13-7a
Market Structures & Efficiency
• Market Structure Overview (cont.)
13-7b
Maximizing Profit (Appendix Slide 1)
• A Pure Competition Firm
TABLE 13A-1
Price, Quantity, and Revenue Information for a Purely Competitive Seller
13-8a
Maximizing Profit (Appendix Slide 2)
• A Pure Competition Firm (cont.)
 Determining the Profit-Maximizing Output
• MC = MR
FIGURE 13A-1
Profit-Maximizing Output for a Purely Competitive Seller
13-8b
Maximizing Profit (Appendix Slide 3)
• A Pure Competition Firm (cont.)
 Maximizing Profit or Minimizing Loss
• MC = MR
FIGURE 13A-2
A Purely Competitive Seller Maximizing Profit or Minimizing Loss
13-8c
Maximizing Profit (Appendix Slide 4)
• A Firm with a Downward-Sloping Demand Curve
 Marginal revenue curve position
• Lies below the demand curve because the price must be
lowered to sell a larger quantity.
• Marginal revenue for each additional unit demanded is
therefore less than price.
FIGURE 13A-3
Demand and Marginal Revenue from Selling Chairs
13-8d
Maximizing Profit (Appendix Slide 5)
• A Firm with a Downward-Sloping Demand Curve
 Determining the Profit-Maximizing Output
• DP @ (MC = MR)
• Use the demand curve price at the point where marginal
cost and marginal revenue intercept.
FIGURE 13A-4
Profit-Maximizing Output for a Firm with a Downward-Sloping Demand Curve
13-8e
Maximizing Profit (Appendix Slide 6)
• A Firm with a Downward-Sloping Demand Curve
 Maximizing Profit or Minimizing Loss
• Difference between DP and ATCP @ (MC = MR)
FIGURE 13A-5
A Firm with a Downward-Sloping Demand Curve Maximizing Profit or Minimizing Loss
13-8f
Chapter 13 – Competition in Markets
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ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work
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