1. Chapter 7 Competitive market

2.  Market structure

3. Features of 4 market structures № of firms Entryproduct market power E.g P.compe tition Very many unrestri cted Identica l Noneagricult ure Monopol istic C Manyunrestri cted Differen tiated SomeRestaur ants/ret ail trade Oligopol y Fewrestricte d bothLimited/ consider able Steel/ monopo ly oneblockeduniqueconsider able Local utility

4. 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

5. KEY CONCEPTS  market structure potential entrant  product differentiation  competitive markets  barrier to entry  barrier to mobility  barrier to exit  perfect competition  price takers

6.  normal profit  economic profit  economic losses  marginal analysis  competitive firm short-run supply curve  competitive firm long-run supply curve.

7. 一、 Definition and features 二.The demand / MR/ AR curves 三.Short – run profit maximization 四.Short-run supply curve for a single competitive firm 五.long-run profit maximization 六.Implications

8. 一.Competitive Environment  1.Definition of Market Structure: 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.

9. 2.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.

10. 一.Competitive Market Characteristics  Basic Features Many buyers and sellers. Product homogeneity. Free entry and exit. Perfect information.  Examples: Agricultural commodities. Prominent markets for intermediate goods and services. Unskilled labor market.

11. 二.Curves of TR, AR and MR Example: ?? Blanks filling ?? To draw the demand curve and the AR and MR curves. QPTRARMREd 05 15 25 35 45 55

12. firm= price taker, price ≠f( the firm ’ s output) **For individual firm, D curve = MR curve= AR curve. (AR=P; MR=P) market firm P

13. 三.Profit maximization Q*=? → To make the Max profit 1. The simple method: TC and TR curve. Q**: The greatest/positive gap between TR and TC curve Max profit=TR-TC  Table 7.1 Fig7.1

15. 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.

16. 2.The complicated one: MC=MR → Q* Max profit = (AR-AC)*Q Example:table7.1 fig7.2

18. Aim: Max profit or Min losses in the S.R Way: by adjusting Q Three questions must be answered first: 1.Should the firm produce? 2.If so, how much? 3.What will be the profit or loss?

19. Answers: 1.If P>ATC, yes. If P=ATC, yes. If ATC>P>AVC, yes. If P= AVC, yes or no If P<AVC, no.

20. 2.Q*: MR= MC. 3.Max profit / Minloss: TR-TC=(AR-ATC)*Q=(P-ATC)*Q Or TR-TFC-TVC=(TR-TVC)-TFC=(P-AVC)*Q-TFC

21. 。。 P Q.q1 q2 q3 q4 P4 P3 P2 p1 MC ATC AVC If P1,Q*=? If P4, Q*=? If P3, profit=? What is the minimum Q to produce?

22. 四.Marginal Cost and Firm Supply curve Marginal cost curve is the short-run supply curve so long as P > AVC.

24. Long-run Firm Supply Marginal cost curve is the long-run supply curve so long as P > ATC.

26. 五． 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.

29. 六． 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.