MANAGERIAL
th
ECONOMICS 11 Edition
By
Mark Hirschey
Competitive Markets
Chapter 10
Chapter 10
OVERVIEW
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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
Chapter 10
KEY CONCEPTS
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market structure
market
potential entrant
product differentiation
competitive markets
barrier to entry
barrier to mobility
barrier to exit perfect
competition
price takers
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normal profit
economic profit
economic losses
marginal analysis
competitive firm
short-run supply
curve
competitive firm longrun supply curve.
Competitive Environment
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What is Market Structure?
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Market structure is the competitive environment.
Number of buyers and sellers.
Potential entrants.
Barriers to entry and exit, etc.
Vital Role of Potential Entrants
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Competition comes from actual and potential
competitors.
Potential entrants often affect price/output decisions.
Factors that Shape the Competitive
Environment
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Product Differentiation
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Production Methods
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Economies of scale can preclude small-firm size.
Entry and Exit Conditions
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R&D, innovation, and advertising are important in
many markets.
Barriers to entry and exit can shelter incumbents from
potential entrants.
Buyer Power
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Powerful buyers can limit seller power.
Competitive Market Characteristics
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Basic Features
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Many buyers and sellers.
Product homogeneity.
Free entry and exit.
Perfect information.
Examples of Competitive Markets
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Agricultural commodities.
Prominent markets for intermediate goods
and services.
Unskilled labor market.
Profit Maximization in Competitive
Markets
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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
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Set Mπ = MR – MC = 0 to maximize profits.
MR=MC when profits are maximized.
Marginal Cost and Firm Supply
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Short-run Firm Supply
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Competitive market price (P) is shown as a
horizontal line because P=MR.
Firm’s marginal-cost curve shows the amount
of output the firm would be willing to supply
at any market price.
Marginal cost curve is the short-run supply
curve so long as P > AVC .
Long-run Firm Supply
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Marginal cost curve is the long-run supply
curve so long as P > ATC.
In long run, firm must cover all necessary
costs of production and earn a normal profit.
Competitive Market Supply Curve
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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
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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.
Competitive Market Equilibrium
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Balance of Supply and Demand
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Equilibrium is a balance of supply and
demand.
Normal Profit Equilibrium
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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.