Comparing Market Structures Long-Run NumberUnrestrictedAbilityEconomic MarketofEntry andto SetProfitsProductNonprice StructureSellersExitPricePossibleDifferentiationCompetitionExamples PerfectNumerousYesNoneNoNoneNoneAgriculture, competitioncoal MonopolisticManyYesSome NoConsiderableYesToothpaste competitiontoilet paper, soap, retail trade OligopolyFewPartialSomeYesFrequentYesCigarettes, steel Pure OneNo (forConsider-YesNoneYesSome electric monopoly entry) able (product is companies, unique) some local telephone companies
How Much Should the Perfect Competitor Produce? The firm will produce the level of output that will maximize profits given the market price. –Total Revenues Economic profit = total revenue (TR) - total cost (TC)
How Much Should the Perfect Competitor Produce? Profit-maximizing rate of production –The rate of production that maximizes total profits, or the difference between total revenues and total costs –Also, the rate of production at which marginal revenue equals marginal cost
Marginal revenue (MR) TR output Marginal cost (MC) TC output Using Marginal Analysis to Determine the Profit-Maximizing Rate of Production
Profit Maximization Total Output/ Sales/TotalMarketTotalTotalMarginalMarginal dayCostsPriceRevenueProfitCostRevenue 0$10$5$0 $ MR > MC MR = MC MR < MC $
Using Marginal Analysis to Determine the Profit-Maximizing Rate of Production Between zero output and MC = MR output, MR > MC and TR is increasing more than TC and profits are increasing MR > MC
Using Marginal Analysis to Determine the Profit-Maximizing Rate of Production MR > MC MC > MR Beyond MC = MR output, MC > MR and TC is increasing more than TR and profits are decreasing.
Characteristics of a Perfectly Competitive Market Structure Perfect Competition –A market structure in which the decisions of individual buyers and sellers have no effect on market price
Characteristics of a Perfectly Competitive Market Structure Scenario –A wheat farmer delivers his winter wheat crop to the grain elevator and is offered a price of $3.00/bushel. –How many bushels will he sell if he wants $3.01/bushel for his wheat? –Can he sell any additional bushels by offering to sell for $2.99/bushel?
Characteristics of a Perfectly Competitive Market Structure Characteristics of perfect competition –Large number of buyers and sellers –Homogenous products When you buy a head of lettuce do you ask what farm it came from? –No barriers to entry or exit –Buyers and sellers have equal access to information
The Demand Curve for a Minidisk Producer 10,00020,00030,00040,00050,000 Industry S D 0 Minidisks per Day Price per Minidisk Individual firm 0 Minidisks per Day 5 E Figure 23-2, Panels (a) and (b) d 5