firms in markets
DESCRIPTION
The Four Types of Market Structure Number of Firms? One firm Few firms Many firms Type of Products? Differentiated products Identical products • Novels Movies Monopolistic Competition Perfect • Wheat Milk Competition • Tap water Cable TV Monopoly • Tennis balls Crude oil OligopolyTRANSCRIPT
Firms in MarketsFirms in Markets
• Tap water• Cable TV
Monopoly
• Novels• Movies
MonopolisticCompetition
• Tennis balls• Crude oil
Oligopoly
Number of Firms?
Perfect
• Wheat• Milk
Competition
Type of Products?
Identicalproducts
Differentiatedproducts
Onefirm
Fewfirms
Manyfirms
The Four Types of Market Structure The Four Types of Market Structure
• A perfectly competitive market has the following characteristics:– There are many buyers and sellers in
the market.– The goods offered by the various sellers
are largely the same.– Firms can freely enter or exit the market.
WHAT IS A COMPETITIVE WHAT IS A COMPETITIVE MARKETMARKET
• As a result of its characteristics, the perfectly competitive market has the following outcomes:– The actions of any single buyer or seller
in the market have a negligible impact on the market price.
– Each buyer and seller takes the market price as given.
WHAT IS A COMPETITIVE WHAT IS A COMPETITIVE MARKETMARKET
• A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker.– Buyers and sellers must accept the
price determined by the market.
WHAT IS A COMPETITIVE WHAT IS A COMPETITIVE MARKETMARKET
• Total revenue for a firm is the selling price times the quantity sold.
TR = (P TR = (P Q) Q)• Total revenue is proportional to the amount of
output.• Average revenue tells us how much revenue a
firm receives for the typical unit sold.• Average revenue is total revenue divided by the
quantity sold.
The Revenue of a Competitive The Revenue of a Competitive FirmFirm
• In perfect competition, average revenue equals the price of the good.
The Revenue of a Competitive The Revenue of a Competitive FirmFirm
A v erag e R ev en u e = T o ta l rev e n u eQ u an tity
P rice Q u an tityQ u an tity
P rice
• Marginal revenue is the change in total revenue from an additional unit sold.
• For competitive firms, marginal revenue equals the price of the good.
The Revenue of a Competitive The Revenue of a Competitive FirmFirm
MR =MR =TR/ TR/ QQ
Table 14-1: Total, Average, and Table 14-1: Total, Average, and Marginal Revenue for a Competitive Marginal Revenue for a Competitive
FirmFirm
664868
664267
663666
663065
662464
661863
$ 661262
$ 6$ 6$ 61
(MR = ∆TR/∆Q)(AR = TR/ Q)(TR = P x Q)(P)(Q)
Marginal Revenue
Average Revenue
Total RevenuePrice
Quantity (in litres)
• The goal of a competitive firm is to maximize profit, which equals total revenue minus total cost.
• This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
PROFIT MAXIMIZATION AND THE PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM’S SUPPLY COMPETITIVE FIRM’S SUPPLY
CURVE CURVE
Table 14-2: Profit Maximization: A Table 14-2: Profit Maximization: A Numerical ExampleNumerical Example
(MR - MC)
Change in Profit
- 3- 2- 101
96147488
86438427
76630366
66723305
56717244
246612183
33648122
$ 4$ 2$ 61561
- $ 3$ 3$ 00
(MC = ∆TC/∆Q)(MR = ∆TR/∆Q)(TR - TC)(TC)(TR)(Q)
Marginal Cost
Marginal RevenueProfitTotal Cost
Total Revenue
Quantity (in litres)
Costs and
Revenue
Quantity0
MC1
Q1
The firm maximizes
profit by producing
the quantity at which
marginal cost equals
marginal revenue.
MC
AVC
Q MAX
MC2
Q 2
P = MR1 = MR2 P = MR ATC
Figure 14-1: Profit Maximization for a Figure 14-1: Profit Maximization for a Competitive Firm Competitive Firm
• While a competitive firm is a price taker, a monopoly firm is a price maker.
• A firm is considered a monopoly monopoly if . . .– it is the sole seller of its product.– its product does not have close
substitutes.
MONOPOLYMONOPOLY
• The fundamental cause of monopoly is barriers to entry.
• Barriers to entry have three sources:– Ownership of a key resource.– The government gives a single firm the
exclusive right to produce some good.– Costs of production make a single producer
more efficient than a large number of producers.
Why Monopolies AriseWhy Monopolies Arise
Cost
Quantity of Output0
Averagetotalcost
Figure 15-1: Economies of Scale as Figure 15-1: Economies of Scale as a Cause of Monopolya Cause of Monopoly
• Monopoly versus Competition– Monopoly
• Is the sole producer• Faces a downward-sloping demand curve• Is a price maker• Reduces price to increase sales
– Competitive Firm• Is one of many producers• Faces a horizontal demand curve• Is a price taker• Sells as much or as little at same price
Pricing and Production Pricing and Production DecisionsDecisions
(a) Competitive Firm (b) MonopolyPrice
0 0
Price
Demand
Demand
Quantity of OutputQuantity of Output
Figure 15-2: Demand Curves for Figure 15-2: Demand Curves for Competitive and Monopoly FirmsCompetitive and Monopoly Firms
• Total RevenueP Q = TR
• Average RevenueTR/Q = AR = P
• Marginal RevenueTR/Q = MR
A Monopoly’s RevenueA Monopoly’s Revenue
Table 15-1: A Monopoly’s Total, Table 15-1: A Monopoly’s Total, Average, and Marginal Revenue.Average, and Marginal Revenue.
- 4 32438
- 242847
053056
263065
472874
682483
891892
$ 10 $ 1010101
------$ 0$ 110
(MR = ∆TR/∆Q)(AR = P x Q)(TR = P x Q)(P)(Q)
Marginal Revenue
Average Revenue
Total RevenuePrice
Quantity of Water
• A Monopoly’s Marginal Revenue– A monopolist’s marginal revenue is
always less than the price of its good.• The demand curve is downward sloping.• When a monopoly drops the price to sell
one more unit, the revenue received from previously sold units also decreases.
A Monopoly’s RevenueA Monopoly’s Revenue
• A Monopoly’s Marginal Revenue– When a monopoly increases the amount
it sells, it has two effects on total revenue (P Q).• The output effect—more output is sold, so
Q is higher.• The price effect—price falls, so P is lower.
A Monopoly’s RevenueA Monopoly’s Revenue
Price
Quantity of Water
1 2 3 4 5 6 7 8
11
109876543210–1–2–3–4
Marginal revenue
Demand (average revenue)
Figure 15-3: The Demand and Figure 15-3: The Demand and Marginal Revenue Curves for a Marginal Revenue Curves for a
Monopoly Monopoly
• A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
• It then uses the demand curve to find the price that will induce consumers to buy that quantity.
Profit MaximizationProfit Maximization
Costs and Revenue
Quantity0
Marginal costMarginal revenue
Demand
Average total cost
Q1 Q2
2. … and then the demand curve shows the price consistent with this quantity.
Monopoly price
B
A
1. The intersection of the MR curve and the MC curve determines the profit maximizing quantity…
QMAX
Figure 15-4: Profit Maximization for a Figure 15-4: Profit Maximization for a Monopoly Monopoly
• Comparing Monopoly and Competition – For a competitive firm, price equals marginal
cost.P = MR = MC– For a monopoly firm, price exceeds marginal
cost.P > MR = MC
Profit MaximizationProfit Maximization
• Profit equals total revenue minus total costs.– Profit = TR - TC– Profit = (TR/Q - TC/Q) Q– Profit = (P - ATC) Q
• The monopolist will receive economic profits as long as price is greater than average total cost.
A Monopoly’s ProfitA Monopoly’s Profit
Costs and Revenue
Quantity0
Monopoly price
QMAX
Monopolyprofit
Marginal cost
Marginal revenue
Demand
Average total cost
D
BE
CAverage
total cost
Figure 15-5: The Monopoly’s Profit Figure 15-5: The Monopoly’s Profit
• Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.
MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
• Types of Imperfectly Competitive Markets– Monopolistic Competition
• Many firms selling products that are similar but not identical.
• Markets that have some features of competition and some features of monopoly.
– Oligopoly• Only a few sellers, each offering a similar or
identical product to the others.
MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
• Attributes of Monopolistic Competition– Many sellers– Product differentiation– Free entry and exit
MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
• Many Sellers– There are many firms competing for the same group
of customers.• Product examples include books, CDs, movies, computer
games, restaurants, piano lessons, cookies, furniture, etc.
• Product Differentiation– Each firm produces a product that is at least slightly
different from those of other firms.– Rather than being a price taker, each firm faces a
downward-sloping demand curve.
MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
• Free Entry or Exit– Firms can enter or exit the market without
restriction.– The number of firms in the market adjusts
until economic profits are zero.
MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
• The Monopolistically Competitive Firm in the Short Run – Short-run economic profits encourage new
firms to enter the market. This:• Increases the number of products offered.• Reduces demand faced by firms already in the
market.• Incumbent firms’ demand curves shift to the left.• Demand for the incumbent firms’ products fall, and
their profits decline.
The Monopolistically The Monopolistically Competitive Firm in the Short Competitive Firm in the Short
RunRun
• The Monopolistically Competitive Firm in the Short Run – Short-run economic losses encourage firms to
exit the market. This: • Decreases the number of products offered.• Increases demand faced by the remaining firms.• Shifts the remaining firms’ demand curves to the
right.• Increases the remaining firms’ profits.
The Monopolistically The Monopolistically Competitive Firm in the Short Competitive Firm in the Short
RunRun
(a) Firm Makes ProfitPrice
Quantity 0
Price
(b) Firm Makes Losses
Quantity 0
Average total cost
Price
Profit
MC
MR
Demand
ATC
Profit-maximizing
quantity
Losses
MC
MR
Demand
ATC
Loss-minimizing
quantity
Price
Average total cost
Figure 17-1: Monopolistic Figure 17-1: Monopolistic Competitors in the Short Run Competitors in the Short Run
• There are two noteworthy differences between monopolistic and perfect competition—excess capacity and markup.
Monopolistic Competition Monopolistic Competition Versus Perfect CompetitionVersus Perfect Competition
(a) Monopolistically Competitive FirmPrice
Quantity 0
Price
(b) Perfectly Competitive Firm
Quantity 0
MC
MR
Demand
ATC
Quantity produced
Marginal cost
Price
Efficient scale
Markup
MC
ATC
P = MC P = MR
Quantity produced = efficient scale
Figure 17-3: Monopolistic versus Figure 17-3: Monopolistic versus Perfect Competition Perfect Competition