Duopoly Monopoly Monopolistic competition Oligopoly Imperfect competition Perfect competition Market Structures

Competitive Firm A perfectly competitive firm is one without market power. –It is not able to alter the market price of the good it produces. –A corn farmer is an example of a perfectly competitive firm. Market power is the ability to alter the market price of a good or service. –Your school book store has market power. A perfectly competitive firm is a price taker. Individual firms output decisions do not affect the market price.

Imperfect Competition Imperfect competition is between the extremes of monopoly and perfect competition. A monopoly firm is one that produces the entire market supply of a particular good or service. –e.g. NZ Post for postal services. In duopoly only two firms supply a particular product. - e.g. Vodafone and Telecom In oligopoly a few large firms supply all or most of a particular product. - e.g. petrol, banks, supermarket chains In monopolistic competition many firms supply essentially the same product but each has brand loyalty. - e.g. local dairies

Market supply Market demand pepe Demand facing single farmer pepe Equilibrium price Market vs. Firm Demand QUANTITY (thousand fish per day) The Fish Market QUANTITY (fish per day) Demand for Individual Farmer's Fish PRICE (per fish)

$18 QUANTITY (baskets per hour) PRICE OR COST (per basket) Marginal cost MC B Bp = MC Profits decreasing Price Profit-maximizing rate of output Profits increasing Maximization of Profits for Competitive Firm

Illustrating Total Profit $18 RATE OF OUTPUT (baskets per hour) COST (per basket) Price Profit per unit Cost per unit Average total cost TOTALPROFIT 2 Marginal cost

Industry Entry and Exit The number of firms in a competitive industry is not fixed. - Industry entry and exit is a driving force effecting market equilibrium. - Economic profits attract firms. - Industry output increases. - Market supply curve shifts right as entry increases. - Price falls. - Firms exit the industry when profit opportunities look better elsewhere. - Firms leave the industry if price falls below average cost. - As firms exit the industry, the market supply curve shifts to the left.

The Lure of Profits QUANTITY (thousands of pounds per day) p1p1 p2p2 E1E1 S2S2 p3p3 S3S3 Market entry pushes price down and... Reduces profits of competitive firm p1p1 p2p2 p3p3 QUANTITY (pounds per day) MC ATC S1S1 Market demand Profits reduce to normal

Long-Run Equilibrium In long-run competitive market equilibrium: –Price equals minimum average cost. –Economic profit is eliminated. The firms make normal profits.

No Barriers to Entry Barriers to entry are obstacles that make it difficult or impossible for would-be producers to enter a market. Examples of barriers to entry include patents, brand loyalty, price controls and control of essential factors of production.

Characteristics of a Competitive Market Many firms Identical products No barriers to entry MC = P Zero economic profit in the long-run Perfect information

MONOPOLY Monopoly can control price or quantity – not both. Demand for the product is downward sloping. P Q d p1 q1q2 The monopolist can control price at p1. Due to market demand, at this price only q1 is demanded. If the monopolist sets price at p1 and produces q2 then only q1 will be demanded. The monopolist must lower price or cut production.

MONOPOLY REVENUE In order to sell more the monopolist must lower the price. QP$P$ TR $ AR $ MR $ AR and MR both decrease with increasing output. MR decreases at a faster rate than AR.

MONOPOLY REVENUE Monopoly Revenue R$R$ Q AR MR TR MR decreases at a faster rate than AR because, in order to sell another unit, a monopoly must lower the price.

MONOPOLY EQUILIBRIUM Monopoly CPRCPR Q MR AR MCAC q p TR=P*Q TC=AC*Q Profit = TR-TC Monopoly may make supernormal profits in the long run due to barriers to entry. Monopolist will maximise profit where MR=MC. Production at q will mean a price of p.

MONOPOLY EFFICIENCY Monopoly or Market CPRCPR Q MR AR MCAC q p Socially optimal equilibrium (allocative efficiency) exists where S=D. SUPPLY DEMAND q1 p1 Socially optimal equilibrium: q1, p1. Monopolist underproduces Monopolist overprices Monopolist creates a dead weight loss

MONOPOLY EFFICIENCY Monopoly or Market CPRCPR Q MR AR MCAC q p SUPPLY DEMAND q1 p1 Socially optimal CS Monopoly CS Socially optimal PS Monopoly PS Dead weight loss