Chapter 7 Competitive market

Market structure
Features of 4 market structures
№ of
firms
Entry
product
P.compe Very
tition
many
unrestri
cted
Identica None
l
Monopol Many
istic C
unrestri
cted
Differen Some
tiated
Oligopol Few
y
restricte both
d
monopo one
ly
blocked
unique
market E.g
power
agricult
ure
Restaur
ants/ret
ail trade
Limited/ Steel/
consider
able
consider Local
able
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.



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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


Production Methods

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Economies of scale can preclude small-firm
size.
Entry and Exit Conditions


R&D, innovation, and advertising are important
in many markets.
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

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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
Q
Example:
?? Blanks filling
0
?? To draw the demand
curve and the AR
1
and MR curves.
P
5
5
2
5
3
5
4
5
5
5
TR
AR
MR Ed
P
market
firm
firm= price taker, price ≠f( the firm’s output)
**For individual firm, D curve = MR curve= AR curve. (AR=P; MR=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



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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.R
Way: 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)*Q
Or
TR-TFC-TVC=(TR-TVC)-TFC=(P-AVC)*Q-TFC
If P1,Q*=? If P4, Q*=? If P3, profit=?
What is the minimum Q to produce?

。
MC
P
ATC
P4
AVC
P3
P2
p1
.q1 q2
q3
q4
Q
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

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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
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.