Chapter 10
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
„
„
Competitive Markets
„
Chapter 10
„
„
„
„
1
2
Chapter 10
KEY CONCEPTS
„
„
„
„
„
„
„
„
„
market structure
market
potential entrant
product differentiation
competitive markets
barrier to entry
barrier to mobility
barrier to exit perfect
competition
price takers
„
„
„
„
„
„
Competitive Environment
normal profit
economic profit
economic losses
marginal analysis
competitive firm
short-run supply
curve
competitive firm longrun supply curve.
3
„
„
„
„
„
„
Market structure is 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.
4
Factors that Shape the Competitive
Environment
„
R&D, innovation, and advertising are important in
many markets.
„
Production Methods
„
Entry and Exit Conditions
„
„
„
What Is a Market?
Product Differentiation
„
A
A "process"
"process" by
by which
which buyers
buyersand
and sellers
sellers get
get
together
togetherand
and agree
agree on
on the
the terms
terms of
of trade
trade in
in order
order
to
to exchange
exchange goods
goods or
or services.
services.
Economies of scale can preclude small-firm size.
Barriers to entry and exit can shelter incumbents from
potential entrants.
Buyer Power
„
5
What is Market Structure?
Powerful buyers can limit seller power.
6
1
What Is a Perfectly Competitive
Market?
What Is a Perfectly Competitive
Market?
• Homogenous product
• Homogenous product
• Freedom of entry and exit
7
8
What Is a Perfectly Competitive
Market?
What Is a Perfectly Competitive
Market?
• Homogenous product
„
Large numbers of buyers and sellers
• Freedom of entry and exit
„
Product Homogeneity
• Large numbers of buyers and sellers
„
Free entry and exit
„
Perfect Dissemination of Information
Page
Page 323
323
Which characteristic is the most important one?
9
10
What Is a Perfectly
Competitive Market?
Barriers to Entry
„
Large numbers of buyers and sellers
„
Product Homogeneity
„
Free entry and exit
„
Perfect Dissemination of Information
Page
Page 323
323
Which characteristic is the most important one?
11
Blackberry
Blackberryfrom
fromRIM
RIM==Phone,
Phone,email,
email,SMS,
SMS,Internet
InternetBrowser,
Browser,Calendar
Calendar
32 MB memory -- wireless modem -- 4.6 x 2.3 x 0.8 inches --Weighs 4.2
ounces, Bluetooth, Speakerphone, High Resolution backlit screen, 65,000
colors – Trackwheel -- Operates on rechargeable Lithium battery – 8 days
standby, 4 hours talk time – USB synchronization with PC
12
2
Barriers to Entry
Barriers to
Entry
Original Blackberry from RIM – Email, paging, Wireless Internet,
calendar, address book and task list applications -- 32-bit Intel™
processor -- 4 MB flash memory -- wireless modem -- 3.5” x 2.5” x
0.93” --Weighed less than 5 ounces (including battery) Alerts: vibrate,
tone, silent -- Thumb-operated Trackwheel -- Operated on one AA
alkaline battery
13
14
Sears Catalog
8-digit, four function, floating point
Sears Catalog
8-digit, four function, floating point
1971
1972
1973
1974
1975
1976
15
1971
1972
1973
1974
1975
1976
16
Sears Catalog
8-digit, four function, floating point
Sears Catalog
8-digit, four function, floating point
1971 no advertisement
1972 $179.95
1973
1974
1975
1976
17
no advertisement
1971 no advertisement
1972 $179.95
1973 $98.95
1974
1975
1976
18
3
Sears Catalog
8-digit, four function, floating point
Sears Catalog
8-digit, four function, floating point
1971
1972
1973
1974
1975
1976
1971 no advertisement
1972 $179.95
1973 $98.95
1974 $59.95
1975
1976
19
no advertisement
$179.95
$98.95
$59.95
$16.96
20
Sears Catalog
8-digit, four function, floating point
1971
1972
1973
1974
1975
1976
Equilibrium Price
„
no advertisement
$179.95
$98.95
$59.95
$16.96
did not sell so simple a
calculator
The price at which:
„
„
Consumers can purchase as much as they
want
Producers can sell as much as they want
No shortage or surplus
21
22
Prices Are The Key!
Prices are signals containing information
Market
MarketPrice
Price
Determination
Determinationin
in
Perfect
Perfect
Competition
Competition
23
24
4
Closed Economy Equilibrium
How is the equilibrium price
determined?
25
26
Role of Prices
Role of Prices
Prices perform three functions:
The key insight of Adam Smith's Wealth of Nations is
misleadingly simple:
„„
„„
If an exchange between two parties is voluntary, it will
not take place unless both parties believe they will
benefit from it.
They
They provide
provide an
an incentive
incentive to
to adopt
adopt those
those
methods
methods of
of production
production that
that are
are least
least costly
costly (and
(and
thereby
thereby use
use available
available resources
resources for
for the
the most
most
highly
highly valued
valued purpose).
purpose).
Most economic fallacies derive from the neglect of
this simple insight, from the tendency to assume that
there is a fixed pie, that one party can gain only at the
expense of another.
27
They
They transmit
transmit information.
information.
„„
They
They determine
determine who
who gets
gets how
how much
much of
of the
the
product
product --- the
the distribution
distribution of
of income.
income.
28
A Price Too High!
Process Which Results from a
Price Which is Too High
„„ ...
... Consumers
Consumers consume
consume less
less than
than producers
producers
want
want to
to sell
sell
„„ ...
... A
A temporary
temporary surplus
surplus develops
develops
„„ ...
... The
The price
price falls
falls towards
towards the
the equilibrium
equilibrium price
price
29
30
5
A Price Too Low!
Process Which Results from a
Price Which is Too Low
„„ ...
... Consumers
Consumers want
want to
to buy
buy more
more than
than
producers
producers want
want to
to produce
produce
„„ ...
... A
A temporary
temporary shortage
shortage develops
develops
„„ ...
... The
The price
price increases
increases towards
towards the
the
equilibrium
equilibrium price
price
31
32
Shifting Curves
Shifting Curves
Supply Shifters
(the four most important ones)
Demand Shifters
(the four most important ones)
„„ New
New technology
technology
„„ Income
Income
„„ Discovery
Discovery of
of new
new resources
resources
„„ Population
Population
„„ Number
Number of
of firms
firms
„„ Advertising
Advertising
„„ Prices
Prices of
of inputs
inputs
„„ Prices
Prices of
of complements
complements and
and substitutes
substitutes
33
Note
Note carefully
carefully that
that the
the "demand
"demand shifters"
shifters"
are
are different
different from
from the
the "supply
"supply shifters."
shifters."
34
Demand
Demand Curve
Curve for
for the
the Market
Market in
in
Perfect
Perfect Competition
Competition
Movement Toward Equilibrium
The Market
The Firm
$7.80
35
38
6
Profitability and Firm Size
„
See Data on page 345
Next
Next
40
7