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ECON 308 Week 5 Chapter 6: Market Structure Market structure: Objectives Students should be able to Differentiate among the four archetypal market structures.

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Presentation on theme: "ECON 308 Week 5 Chapter 6: Market Structure Market structure: Objectives Students should be able to Differentiate among the four archetypal market structures."— Presentation transcript:

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2 ECON 308 Week 5 Chapter 6: Market Structure

3 Market structure: Objectives Students should be able to Differentiate among the four archetypal market structures Distinguish between price takers and price searchers

4 Market structure What is a market? All firms and individuals willing and able to buy or sell a particular product What is market structure? Defined by attributes of the market environment

5 Demand Facing the Firm $P Q QQQ D1D1 D2D2 D3D3 D4D4 Increasing degrees of Competition Increasing degrees of Market Power

6 Market structure the archetypes Monopoly Oligopoly Monopolistic competition Perfect competition

7 Alternative Market Structures The Most Competitive Case: The Price Taker Firm

8 Perfect competition = Price Taker Characteristics Many buyers and sellers Product homogeneity Low cost and accurate information Free entry and exit Best regarded as a benchmark

9 Market and Firm Demand $P Q/T Pe Qe $P Q/T Pe Market Firm D D D S S

10 Firm supply Short run –Marginal cost curve above average variable cost –P* = SRMC Long run –Long-run marginal cost curve above long-run average cost

11 Price Taker Firm $ P Q/T PePe D = MR MC QeQe Profit Maximizing Rate of output Price = Marginal Revenue

12 Total Revenue = P e x Q e $ P Q/T PePe D MC QeQe Total Revenue

13 $ P Q/T PePe D MC QeQe AC Total Cost = AC x Q AC at Qe Total Cost Total Cost

14 Profit = TR - TC $ P Q/T PeD MC Q AC

15 $ P Q/T PePe D = MR MC QeQe AC Profits occur if (P=MC) > AC

16 Market Response to Profits $P Qx/T Pe Qe D D So S P Q

17 Price Taker Firm: Zero Profits $ P Q/T P e D = MR MC QeQe ATC D

18 Price Taker Firm: Loss $ P Q/T PePe D = MR MC QeQe ATC Loss

19 Market Response to Losses $P Qx/T P Q D D S S So PoPo QoQo

20 Price Taker Firm: Zero Profits $ P Q/T P e D = MR MC QeQe ATC D PoPo

21 Implications of Price-Taker Industry Demand for the firm is horizontal at the market price Efficiency: Price equals marginal cost of production Competition drives price to equal Average cost Economic profits only exist in the short-run.

22 Long-Run Industry Equilibrium $P Q/T Pe Qe $P Q/T Pe Market Firm D D D S S MC ATC Qe

23 Sources of Market Power: Barriers to entry Incumbent reactions Specific assets Economies of scale Excess capacity Reputation effects Incumbent advantages Precommitment contracts Licenses and patents Learning-curve effects Pioneering brand advantages

24 Monopoly Strong barriers to entry single supplier Profit maximization –faces market demand and sets MR=MC Unexploited gains from trade

25 Oligopoly A few firms produce most market output Products may or may not be differentiated Effective entry barriers protect firm profitability Firm interdependence requires strategic thinking

26 Monopolistic competition Multiple firms produce similar but differentiated products Firms face downsloping demand curves Profit maximization occurs where MC=MR In the limit, firms compete away economic profits Tend to see lots of advertising


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