1. MANAGERIAL ECONOMICS 11 th Edition By Mark Hirschey

2. Competitive Markets Chapter 10

3. Chapter 10 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

4. Chapter 10 KEY CONCEPTS market structure market 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.

5. Competitive Environment What is Market Structure? Market structure is the competitive environment. 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.

6. Factors that Shape the Competitive Environment Product Differentiation R&D, innovation, and advertising are important in many markets. Production Methods Economies of scale can preclude small-firm size. Entry and Exit Conditions Barriers to entry and exit can shelter incumbents from potential entrants. Buyer Power Powerful buyers can limit seller power.

7. Competitive Market Characteristics Basic Features Many buyers and sellers. Product homogeneity. Free entry and exit. Perfect information. Examples of Competitive Markets Agricultural commodities. Prominent markets for intermediate goods and services. Unskilled labor market.

8. Profit Maximization in Competitive Markets Profit Maximization Imperative 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 M π = MR – MC = 0 to maximize profits. MR=MC when profits are maximized.

11. Marginal Cost and Firm Supply Short-run Firm Supply 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.

13. Long-run Firm Supply 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.

15. Competitive Market Supply Curve Market Supply With a Fixed Number of Competitors 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 prices and profits to rise for remaining competitors.

18. 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.