chapter 8 types of market structure in the construction industry
TRANSCRIPT
Chapter 8
Types of Market Structure in the Construction Industry
Markets and the Competitive Environment
Economists identify four market types:
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
Markets and the Competitive Environment
1. Perfect competition
Arises when there are many firms each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry.
Markets and the Competitive Environment
2. Monopolistic competition
A market structure in which a large number of firms compete by making similar buy slightly different products.
Product differentiation gives a monopolistically competitive firm an element of monopoly power.
Markets and the Competitive Environment
3. Oligopoly
A market structure in which a small number of firms compete.
Markets and the Competitive Environment
4. Monopoly
An industry that produces a good or service for which no close substitutes exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms.
Perfect Competition
Characteristics of Perfect Competition
– Many firms, each selling an identical
product.
– Many buyers.
– No restrictions on entry into the industry.
Perfect Competition
Characteristics of Perfect Competition
– Firms in the industry have no advantage
over potential new entrants.
– Firms and buyers are well informed
about prices of the products of each firm
in the industry.
Perfect Competition
As a result of these characteristics, perfect competitors are price takers.
Price takers
Firms that cannot influence the price of a good or service.
Economic Profit and Revenue
The firm’s goal is to maximize economic profit.
Total cost is the opportunity cost -- including normal profit.
Economic Profit and Revenue
Total revenue is the value of a firm’s sales.
– Total revenue = P Q
Marginal revenue (MR)
– Change in total revenue resulting from a one-unit increase in quantity sold.
Average revenue (AR)
– Total revenue divided by the quantity sold—revenue per unit sold.
In perfect competition, Price = MR = AR
The Firm’s Decisions inPerfect Competition
A firm’s task is to make the maximum economic profit possible, given the constraints it faces.
In order to do so, the firm must make two decisions in the short-run, and two in the long-run.
The Firm’s Decisions inPerfect Competition
Short-run A time frame in which each firm has a given plant and the number of firms in the industry is fixed
Long-run A time frame in which each firm can change the size of its plant and decide to enter the industry.
The Firm’s Decisions inPerfect Competition
In the short-run, the firm must decide:
– Whether to produce or to shut down.
– If the decision is to produce, what quantity to produce.
The Firm’s Decisions inPerfect Competition
In the long-run, the firm must decide:
– Whether to increase of decrease its plant size.
– Whether to stay in the industry or leave it.
We will first address the short-run.
TC
Total Revenue, Total Cost,and Economic Profit
Quantity (sweaters per day)
Tot
al r
even
ue &
tota
l cos
t (
doll
ars
per
day)
0 4 9 12
100
300
183
225
TR
Economicloss
Economicprofit =TR - TC
Economicloss
Total Revenue, Total Cost,and Economic Profit
Quantity (sweaters per day)
4 9 12-20
0
-40
42
20
Profitmaximizing quantity
Profit/loss
Economicprofit
Economicloss
Prof
it/l
oss
(do
llar
s pe
r da
y)
Economic profit/loss
Marginal Analysis
Using marginal analysis, a comparison is made between a units marginal revenue and marginal cost.
Marginal Analysis
If MR > MC, the extra revenue from selling one more unit exceeds the extra cost.
– The firm should increase output to increase profit.
If MR < MC, the extra revenue from selling one more unit is less than the extra cost.
– The firm should decrease output to increase profit.
If MR = MC economic profit is maximized.
Profit-Maximizing Output
Quantity (sweaters per day) 8 9 10
10
20
30
Mar
gina
l rev
enue
& m
argi
nal c
ost
(do
llar
s pe
r da
y)
MR25
MCProfit-maximizationpoint
Loss from10th sweater
Profit from9th sweater
0
The Firm’s Short-Run Supply Curve
Fixed costs must be paid in the short-run.
Variable-costs can be avoided by laying off workers and shutting down.
Firms shut down if price falls below the minimum of average variable cost.
MR2
MR1
A Firm’s Supply Curve
Quantity (sweaters per day)7 9 10
17
25
31
Mar
gina
l rev
enue
& m
argi
nal c
ost
(do
llar
s pe
r da
y) MC = S
MR0
AVC
s
Shutdown point
0
A Firm’s Supply Curve
Quantity (sweaters per day)7 9 10
17
25
31
Mar
gina
l rev
enue
& m
argi
nal c
ost
(do
llar
s pe
r da
y) S
s
0
Short-Run Industry Supply Curve
Short-run industry supply curve
Shows the quantity supplied by the industry at each price when the plant size of each firm and the number of firms remain constant.
It is constructed by summing the quantities supplied by the individual firms.
END