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Week 5 Chapter 6: Market Structure

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1 Week 5 Chapter 6: Market Structure
ECON 308 Week 5 Chapter 6: Market Structure

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

3 Market structure What is a market? What is market structure?
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

4 Demand Facing the Firm $P $P $P $P D1 D3 D4 D2 Q Q Q Q
 Increasing degrees of Competition   Increasing degrees of Market Power 

5 Market structure the archetypes
Monopoly Oligopoly Monopolistic competition Perfect competition

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

7 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

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

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

10 Price Taker Firm $ P MC Price = Marginal Revenue Pe D = MR
Profit Maximizing Rate of output Qe Q/T

11 Total Revenue = Pe x Qe $ P MC Pe D Total Revenue Qe Q/T

12 Total Cost = AC x Q $ P MC AC Pe D AC at Qe Total Cost Qe Q/T

13 Profit = TR - TC $ P MC AC Pe D Q Q/T

14 Profits occur if (P=MC) > AC
Pe D = MR Qe Q/T

15 Market Response to Profits
D So S’ Pe P’ So D Qx/T Qe Q’

16 Price Taker Firm: Zero Profits
MC ATC D Pe’ D’ = MR Qe Q/T

17 Price Taker Firm: Loss $ P MC ATC Loss Pe D = MR Qe Q/T

18 Market Response to Losses
D S’ So P’ Po S’ D Qx/T Q’ Qo

19 Price Taker Firm: Zero Profits
MC ATC Pe’ D’ = MR Po D Qe Q/T

20 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.

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

22 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

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

24 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

25 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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