lecture 6 6
TRANSCRIPT
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Chapter 6
MARKET STRUCTURE
Chapter 6
MARKET STRUCTURE Upon completion this chapter, you should be able to :B Identify 4 types of market structureB Identify characteristics of each marketB Compare the supply and demand curve of each market
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Market structure depends on 2 main factors:B Quantity ProductB Price of the Product in the Market
How markets are organized :1. Types of product produced2. How many firms in the industry3. The freedom of entering and leaving the market4. The market price of the product5. The knowledge of sellers and buyers towards the product
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4 Types of Market 4 Types of Market Competitive / Perfect competition Market
B Many buyers and sellers in the market
Monopoly MarketB Only one sellers in the market
Monopolistic Competition MarketB Many sellers and buyers in the market but the competition is as high as in
the competitive market.
Oligopoly MarketB Only few sellers in the market
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Market Structure Market StructureNumber of firms ?
Identicalproducts
One firms Few firms Many firms
MONOPOLY water
electricity phone (house)
OLIGOPOLY oil / petrol
flighttyres
MONOPOLISTICCOMPETITION
movies
novelsmagazines
COMPETITIVEMARKET
instant noodle
pen canned drink
Differentiatedproducts
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COMPETITIVE / PERFECT
COMPETITION MARKET
COMPETITIVE / PERFECT
COMPETITION MARKET Characteristic of Perfect Competition
B Many buyers and sellers in the marketB Firms are PRICE TAKERS
Firms cannot influence the price of the goods andservices
B The product is homogeneous ( identical )B Both buyers and sellers have perfect knowledgeB
Freedom to enter or leave the industryB Perfectly elastic demand curve at the price set by themarket
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Revenue Concepts
in Perfect Competition Market
Revenue Concepts
in Perfect Competition Market Total Revenue (TR) = P x Q
B The value of the firms sale
Average Revenue (AR) = TR / Quantity soldB Revenue per unit sold
Marginal revenue (MR) = Change in TR Change inquantity
B The change in TR resulting from one unit change in the quantity sold.B In perfect competition, the price is constant. So the change in TR is
equal to price. ( MR = PRICE )
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Demand Curve, AR curve
and TC curveAR is always equal to Price
MR is equal to price only for firms in perfectly competitive market.
Price
Quantity sold
P = AR = MR3.00
Output PriceRM
TR RM
AR MR
1 3 3 3 3
2 3 6 3 3
3 3 9 3 3
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Profit Maximizing Output
Because the firm cannot affect the price of its product, to maximize profit it adjust the level of production.
Profit maximizing level of output can bedetermined using two approaches :
B TR and TC approachB Marginal Analysis
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Profit Max : The Smith Dairy FarmPrice(P)
Quantit(Q)
Tota l Reven(TR= PxQ)
Total Cost(TC)
Profit(TR-TC)
Marginal Rev e(MR=
Marginal CoMC=
0 $0 .00 $3 .00 -$3 .00
$6.00 1 $6 .00 $5 .00 $1 .00 $6 .00 $2 .00$6.00 2 $12 .00 $8 .00 $4 .00 $6 .00 $3 .00$6.00 3 $18 .00 $12.00 $6 .00 $6 .00 $4 .00$6.00 4 $24 .00 $17.00 $7 .00 $6 .00 $5 .00$6.00 5 $30 .00 $23.00 $7 .00 $6 .00 $6 .00$6.00 6 $36 .00 $30.00 $6 .00 $6 .00 $7 .00$6.00 7 $42 .00 $38.00 $4 .00 $6 .00 $8 .00$6.00 8 $48 .00 $47.00 $1 .00 $6 .00 $9 .00
QT R / QTC /
Profit is maximized if the farm produces 4 or 5 gallons of milk The profit-maximizing quantity can also be found by comparing marginal
revenue and marginal cost.As long as marginal revenue exceeds marginal cost, increasing output will raise
profit.If marginal revenue is less than marginal cost, the firm can increase profit by
decreasing output.Profit-maximization occurs where marginal revenue is equal to marginal cost.
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The Marginal-Cost Curve and the
Firms Supply Decision Cost curves have special features that are important
for our analysis.a.The marginal cost curve is upward-sloping.
b.The average total cost curve is u-shaped.c.The marginal cost curve crosses the average total costcurve at the minimum of average total cost.
Marginal and average revenue can be shown by ahorizontal line at the market price.
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P = AR =MR
P=MR 1
MC
Profit Maximization for the Competitive Firm...
Quantit0
Costsand
Revenue
The firmmaximizes profitby producing thequantity at whichmarginal costequals mar ginalrevenue.
MC
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Occurs at quantity where :MC = MR
How ?B When MR > MC -----
increasing profit
B When MR < MC -----decreasing profit
B When MR = MC ----- profitis maximized
Q1 Q2
MC2
MC1
Quantity
(Q)
Profit
(TR-TC)
Marginal Revenue
(MR= )
Marginal Cost
MC=0 -$3.001 $1.00 $6.00 $2.002 $4.00 $6.00 $3.003 $6.00 $6.00 $4.004 $7.00 $6.00 $5.005 $7.00 $6.00 $6.006 $6.00 $6.00 $7.007 $4.00 $6.00 $8.008 $1.00 $6.00 $9.00
QTR / QTC /
P=AR=MR
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Short Run Equilibrium in
Perfect Competition
Short Run Equilibrium in
Perfect Competition 3 alternative situations :B
Situation A Economic ProfitB Situation B Break EvenB Situation C Economic Loss
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Measuring Profit in the Graph for theCompetitive Firm...
Why the firm gains an economic profits?Why the firm gains an economic profits?
1. Producing an output where MC=MR 1. Producing an output where MC=MR
2. P/MR/AR> ATC2. P/MR/AR> ATC
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Profit
Measuring Profit in the Graph for theCompetitive Firm... a. A Firm with Profits
(Economic Profits)Price
P
ATC
0
P = AR = MR
MC
QuantityQ
ATC
Profit-maximizing quantity
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Measuring Profit in the Graph for theCompetitive Firm...
Why the firm gains a break-event?Why the firm gains a break-event?
1. Producing an output where MC=MR 1. Producing an output where MC=MR 2. P/MR/AR= ATC, that means the firm2. P/MR/AR= ATC, that means the firm
still can cover its fixed cost.still can cover its fixed cost.3. Earns normal profit3. Earns normal profit
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Measuring Profit in the Graph for theCompetitive Firm...
P = AR = MR
Quantity
P=ATC
Price
0
MC
ATC
QBreak-even quantity
b. A Firm with break-even(Normal profit)
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Measuring Loss in the Graph for theCompetitive Firm...
Why the firm experience losses?Why the firm experience losses?
1. Producing an output where MC=MR 1. Producing an output where MC=MR 2. But P/MR/AR< ATC, that means2. But P/MR/AR< ATC, that means
the firm still can cover its fixed cost.the firm still can cover its fixed cost.3. Earns normal profit3. Earns normal profit
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Loss
Measuring Loss in the Graph for theCompetitive Firm... c. A Firm with Losses
Q
Price
ATC
P = AR = MR
MC ATC
P
Quantity0
Loss-minimizing quantity
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There are 2 types of losses?There are 2 types of losses?1.1. P > AVCP > AVC
can cover its AVC such as raw materials, wagescan cover its AVC such as raw materials, wagesand part of its fixed costsand part of its fixed costs
firm may continue to operate in short runfirm may continue to operate in short run
2. P < AVC2. P < AVC cant cover its AVC and ATCcant cover its AVC and ATC
the firm profit maximizing action is to shut downthe firm profit maximizing action is to shut downtemporarily at P=AVCtemporarily at P=AVC
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Loss
Measuring Loss in the Graph for theCompetitive Firm...
P = AR = MR
Quantity
Price/ Cost
P
Q
MC ATC
AVC ATC
AVC
0
c. A Firm with Losses
(P>AVC)
Loss-minimizing quantity
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Measuring Loss in the Graph for theCompetitive Firm...
Loss
Price/Cost
ATC
P P = AR = MR
Quantity0
Loss-minimizing quantity
MC ATC
Q
AVC
AVC
c. A Firm with Losses
(P
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The Marginal-Cost Curve and theFirms Supply Decision...
Quantity0
Costsand
RevenueMC
ATC
AVC
Q 1
P 1
P 2
Q 2
This section of thefirms MC curve isalso the firms supply curve .
Because of firms MC curve determinedhow much the firms is willing to supplyat any price
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The Firms Short-Run Decision to
Shut Down @ Exit x A shutdown refers to a short-run decision not to
produce anything during a specific period of
time because of current market conditions.
x Exit refers to a long-run decision to leave themarket.
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The Firms Short-Run Decision toShut Down
The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down.B Sunk costs are costs that have already been committed
and cannot be recovered.
The firm shuts down if the revenue it gets from producing is less than the variable cost of production .Shut down if TR < VC
Shut down if TR/Q < VC/Q
Shut down if P < AVC
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The Firms Short-Run Decision to Shut Down...
Quantity
ATC
AVC
0
P/Costs
MC
If P < AVC, shut down.
If P > AVC,keep producingin the short run.
If P > ATC,keep producingat a profit.
Firms short-runsupply curve.
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The Firms Long-Run Decision to Exit
or Enter a Market x In the long-run, the firm
exits if the revenue itwould get from
producing is less thanits total cost.
Exit if TR < TC
Exit if TR/Q < TC/Q Exit if P < ATC
x A firm will enter theindustry if such an actionwould be profitable.
Enter if TR > TC
Enter if TR/Q > TC/Q Enter if P > ATC
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The Competitive Firms Long-Run Supply Curve...
Quantity
MC = Long-runS
ATC
AVC
0
Costs
Firm entersif P > ATC
Firmexitsif P