1. Competition

2. Market Structure
The number and relative size of firms in an industry.

3. Market Structures Imperfect competition Perfect competition
Monopolistic
competition
Oligopoly
Duopoly
Monopoly

4. 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.
It is a price taker.

5. Competitive Market
A competitive market is one in which no buyer or seller has market power.
No single producer or consumer has any control over the price or quantity of the product.

6. Monopoly
A monopoly firm is one that produces the entire market supply of a particular good or service.
It is a price setter, not a price taker.

7. Market Power
Market power is the ability to alter the market price of a good or service.
Your campus book store has market power.

8. Imperfect Competition
Imperfect competition is between the extremes of monopoly and perfect competition.

9. Imperfect Competition
In duopoly only two firms supply a particular product.
In oligopoly a few large firms supply all or most of a particular product.

10. Imperfect Competition
In monopolistic competition many firms supply essentially the same product but each has brand loyalty.

11. Perfect Competition
Perfectly competitive firms are pretty much faceless.
They have no brand image, no real market recognition.

12. Perfect Competition A perfectly competitive firm is one . . .
. . . whose output is so small in relation to market volume,
. . . that its output decisions have no perceptible impact on price.

13. No Market Power
The output of a lone perfect competitor is so small relative to market supply that it has no significant effect on the total market quantity or price.

14. Price Takers A perfectly competitive firm is a price taker.
Individual firms output decisions do not effect the market price.

15. Price Takers
Individual firms must take the market price and do the best they can within these constraints.

16. Market Demand vs. Firm Demand
You must distinguish between the market demand curve and the demand curve confronting a particular firm.

17. Market Demand vs. Firm Demand
The market demand curve is always downward sloping.
The demand curve facing a perfectly competitive firm is horizontal.

18. Demand for Individual farmer's catfish
Market vs. Firm Demand
QUANTITY (thousand fish per day)
The catfish market
QUANTITY (fish per day)
Demand for Individual farmer's catfish
PRICE (per fish)
Market
supply
Equilibrium price
Demand facing single farmer pe pe
Market
demand

19. The Firm’s Production Decision
Choosing a rate of output is a firm’s production decision.
It is the selection of the short-term rate of output with existing plant and equipment.

20. Total revenue = price x quantity
Output and Revenues
Total revenue is the price of a product multiplied by the quantity sold in a given time period.
Total revenue = price x quantity

21. Revenues vs. Profits
Profit is the difference between total revenue and total cost.
Maximizing output or revenue is not the same as maximizing profits.

22. Revenues vs. Profits
Total profits depend on how costs increase as output expands.

23. Profit Maximization
To maximize profit, the firm should produce an additional unit of output only if it brings in more revenue than it costs.

24. Price
Since competitive firms are price takers, they must take whatever price the market has put on their products.

25. Marginal Cost
Marginal cost is the increase in total costs associated with a one-unit increase in production.

26. Marginal Cost
Marginal cost generally increases as rate of production increases due to diminishing returns.

27. The Costs of Catfish Production

28. The Costs of Catfish Production
$18 F 16
Marginal cost 14 E 12 10 D
COST (dollars per basket) 8 C 6 B 4 2 1 2 3 4 5 6 7
RATE OF OUTPUT (baskets per hour)

29. Profit-Maximizing Rate of Output
Never produce anything that costs more than it brings in.
Boils down to comparing price and marginal cost.

30. Profit-Maximizing Rate of Output
A competitive firm wants to expand the rate of production whenever price exceeds marginal cost.

31. Profit-Maximizing Rate of Output
Short-run profits are maximized at the rate of output where price equals marginal cost.

32. Short-Run Decision Rules for a Competitive Firm
Price > MC increase output rate
Price = MC maintain output and maximize profit
Price < MC decrease output rate

33. Maximization of Profits for Competitive Firm

34. Maximization of Profits for Competitive Firm
$18
Marginal cost 16
Profits decreasing 14 B
p = MC 12
Price
Profits increasing 10
PRICE OR COST (per basket) 8 6
Profit-maximizing rate of output 4
MCB 2 1 2 3 4 5 6 7
QUANTITY (baskets per hour)

35. Total Profit Total profit can be computed in one of two ways:
Total profit = total revenue – total cost
Total profit = average profit x quantity sold

36. Total Profit Profit per unit = p – ATC
Profit per unit equals price minus average total cost
Profit per unit = p – ATC

37. Total profits = (p – ATC) X q
Total profits equals profit per unit times quantity
Total profits = (p – ATC) X q

38. Total Profit
The profit-maximizing producer never seeks to maximize per-unit profits.

39. Total Profit
The profit-maximizing producer has no particular desire to produce at that rate of output where ATC is at a minimum.

40. Total Profit
Total profits are maximized only where p = MC

41. Illustrating Total Profit1 2 3 4 5 6 7 8 10 12 14 16
$18
RATE OF OUTPUT (baskets per hour)
COST (per basket)
Average total cost
Price
TOTAL
PROFIT
Profit per unit
Cost per unit
Marginal cost

42. Supply Behavior
How firms make production decisions helps explain how the market establishes prices and quantities.

43. A Firm’s Supply
Supply is the ability and willingness to sell specific quantities of a good at alternative prices in a given time period.

44. Supply Behavior
To be competitive, quantity supplied is adjusted until MC = price.
The marginal cost curve is the short-run supply curve for a competitive firm.

45. Supply Shifts Marginal costs determine the supply decisions of a firm.
Anything that alters marginal cost will change supply behavior.

46. Supply Shifts
Important influences on marginal cost and supply behavior are:
Price of factor inputs
Technology
Expectations

47. Market Supply
Market supply is the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period.

48. Market Supply
The market supply curve is the sum of marginal cost curves of all firms.

49. Competitive Market Supply1 2 3 4 $5 20 40 60
(a) Farmer A
MCA a
PRICE (per pound) 20 40 60
(b) Farmer B
MCB b 1 2 3 4 $5 20 40 60
(c) Farmer C
MCC c 1 2 3 4 $5 + +
QUANTITY (pounds per day)

50. Competitive Market Supply1 2 3 4 $5
(d) Market supply
QUANTITY (pounds per day) 50
100
150
200
250
300 d
PRICE (per pound) =

51. Competitive Market Supply
Determinants of Market Supply
Price of factor inputs
Technology
Expectations
Number of firms in the industry

52. Industry Entry and Exit
To understand how competitive markets work, we focus on changes in equilibrium rather than on equilibrium itself.

53. 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.

54. Entry
Additional firms will enter the industry when profits are plentiful.

55. Entry Economic profits attract firms. Industry output increases.
Market supply curve shifts right as entry increases.
Price falls.

56. Entry
Industry output increases and price falls when firms enter an industry.

57. Market Entry QUANTITY (thousands of pounds per day) PRICE (per pound)
Entry of new firms E1 p1 p2 E2
Market Demand q1 q2

58. The Tendency Toward Zero Economic Profits
New firms continue to enter a competitive industry so long as profits exist.

59. The Tendency Toward Zero Economic Profits
Once price falls to the level of minimum average cost, all economic profits disappear.

60. The Tendency Toward Zero Economic Profits
Entry is the force driving down market prices.
Price falls until there are no economic profits.
At that point, average cost is at a minimum.

61. Reduces profits of competitive firm
The Lure of Profits
Market entry pushes price down and . . .
Reduces profits of competitive firm
QUANTITY (thousands of pounds per day)
QUANTITY (pounds per day) S1 S2 MC
ATC S3 E1 p1 p1 p2 p2 p3 p3
Market demand

62. Exit
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.

63. Exit Price rises until there are no economic losses.
At that point, average cost is at a minimum.

64. Equilibrium
The existence of profits in a competitive industry induces entry.
The existence of losses in a competitive industry induces exits.

65. Long-Run Equilibrium In long-run competitive market equilibrium:
Price equals minimum average cost.
Economic profit is eliminated.

66. Long-Run Equilibrium
Economic profits will not last long as long as it is easy:
For existing producers to expand production, or
For new firms to enter an industry.

67. Low Barriers to Entry
There are no significant barriers to entry in competitive markets.
Barriers to entry are obstacles that make it difficult or impossible for would-be producers to enter a market.

68. Characteristics of a Competitive Market
Many firms
Identical products
Low barriers to entry
MC = p
Zero economic profit
Perfect information

69. The Virtues of Competition
The market helps signal what should and should not be produced.
The market sends signals which reallocate resources to other products.

70. The Relentless Profit Squeeze
The unrelenting squeeze on prices and profits is a fundamental characteristic of the competitive process.

71. The Relentless Profit Squeeze
The market mechanism works best in competitive markets.
Market mechanism – the use of market prices and sales to signal desired outputs.

72. The Relentless Profit Squeeze
High profits in a particular industry indicate that consumers want a different mix of output.

73. The Relentless Profit Squeeze
As more firms enter the industry, consumers get their desired mix of output.
They get more of the goods they desire at a lower price.

74. Maximum Efficiency
Competitive pressure on prices forces suppliers to produce at the least possible cost.
Society gets the most it can from its available (scarce) resources.

75. Zero Economic Profits
All economic profits are eliminated at the limit of the competitive process.

76. The Social Value of Losses
Economic losses are a signal to producers that they are not using society’s scarce resources in the best way.

77. Policy Perspective
Government should promote competition because competitive markets do best what society wants.
This means keeping markets open and accessible to new entrants.

78. Competition
End of Chapter 6