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Chapter 6 market structure competitive, monopolistic and monopolistically competitive markets
- 1. CHAPTER 6 Market Structure Competitive, Monopolistic, and Monopolistically Competitive Markets
- 2. Learning Objectives After studying this chapter, you will be able to: Explain the concept of market structure and its significance Perfect Describe the characteristics of the different types of market, competition, Monopoly, Monopolistic competition, and oligopoly explain the equilibrium conditions for different types of market in terms of price and output, both in graphical and algebraic terms Identify the sources of monopoly power, and marginal principle to determine the profit maximizing price and output Explain firm’s short run and long run profits and whether firms shut down or continue when firms making loss 2-2
- 4. Perfect competition • Perfectly competitive markets are characterized by: • many buyers and sellers in the market. • Each firm in the market produces a homogeneous (identical) product. • Buyers and sellers have perfect information. • No transaction costs. • Free entry and exit from the market. • price is determined by the interaction of demand and supply, firms in the market will be price-takers • firms earn zero economic profits in the long run. • For more information on Perfect Competition and Monopolies • https://www.youtube.com/watch?v=vihuK8JoK14 8-4
- 5. Price and Demand at the Market and Firm Levels PricePrice S Market Firm Market output 0 D Firm’s output
- 6. Short-Run Output Decisions • In the short run some factors of production are fixed. • To maximize short-run profits, managers must determine how much output will be produced by changing the variable inputs when the fixed inputs are given (fixed costs). 8-6
- 11. Short-Run LossMinimization $ Loss 0 Firm’s output
- 12. The Shut-DownDecision Fixed Cost $ Loss if shut down Loss if produce 0 Firm’s output
- 13. Firms Short-Run SupplyCurve $ Short-run supply curve for individual firm Firm’s output0
- 14. Market Supply Curve P Individual firm’s supply curve Market supply curve S Market output0 1 $12 $10 500
- 15. Long-Run Competitive Equilibrium $ Long-run competitive equilibrium Firm’s output0
- 16. CHAPTER 6 Market Structure Competitive, Monopolistic, and Monopolistically Competitive Markets
- 17. MONOPOLY
- 18. Monopoly and MonopolyPower 8- • A single firm serves an entire market for a good that has no close substitutes. • Barriers to entry: Only seller of a good in a market gives that firm with greater market power. • To maximize profits, a monopoly will chose the output at which marginal revenue equals marginal costs • The demand curve is downward-sloping so marginal revenue is less than market price.
- 19. Sources of MonopolyPower 8- • Economies of scale • Economies of scope • Cost complementarity • Patents and other legal barriers
- 20. Elasticity of Demand and Total Revenues 0 Firm’s output Q 0 Price Revenue Elastic Unitary Unitary Inelastic InelasticElastic MR
- 24. Production with twoplants $/Q MC1 MC2 MCT P* Quantity D =AR MR MR* Q1 Q2 QT 2-
- 25. Barriers to Entry andMonopolist’s profit • A monopolist may earn positive economic profits, because barriers to entry prevents other firms from entering the market to reap a portion of those profits. • Monopoly profits will continue over time provided the monopoly maintains its market power. • Monopoly power, however, does not guarantee positive profits. • Profits depend on the average total cost curve • When the optimal price exactly equals the average total cost of production • In the short run, monopoly earns a zero economic profits or even experience losses. 8-
- 27. The Social Costs of Monopoly Power 8- • The consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost. • Social cost of monopoly is likely to exceed the deadweight loss • Rent Seeking • The larger the transfer from consumers to the firm, the larger the social cost of monopoly
- 29. CHAPTER 6 Market Structure Competitive, Monopolistic, and Monopolistically Competitive Markets
- 31. Monopolistic Competition • There are five main conditions for monopolistic competition to exist: 1. There are many buyers and sellers in the industry. 2. Each firm produces a slightly differentiated product. 3. There are minimal barriers to entry or exit. 4. All firms have identical cost and demand functions. 5.Firms do not take into account competitors’ behaviour in determining price and output. A key difference between monopolistically competitive and perfectly competitive markets is that each firm produces a slightly differentiated product. 2-
- 32. Price MC ATC Profit-Maximizing Monopolistically Competitive Firm Quantity Demand MR Profits
- 33. Long-Run Equilibrium 8- • Monopolistically competitive earns short-run • profits, new firms will enter in the long run to capture some of those profits. • some firms will exit the industry in the long run. • The demand curve will tangential to the average cost curve, firms earn zero economic profit • There is no incentive for additional firms to enter the industry
- 34. Monopolistically Competitive Market Quantity of Brand X Demand0 MR0 Demand1 MR1 Price MC ATC Due to entry of new firms selling other brands 8-
- 35. Price MC ATC Long-Run Monopolistically Competitive Equilibrium Long-run monopolistically competitive equilibrium Quantity of Brand X Demand1 MR1
- 37. Product Differentiation 8- • Firms produces differentiated products in monopolistically competitive markets • Firms in these industries continually convince consumers that their products are better than their competitors. • Two strategies monopolistically competitive firms use to persuade consumers: • Comparative advertising: firms attempts to increase the demand for its brand by differentiation • Niche marketing: goods and services are tailored to meetthe particular market segment
- 38. CHAPTER 6 Market Structure Competitive, Monopolistic, and Monopolistically Competitive Markets
- 39. 2-47 RECAP On Key Terms and Concepts
- 40. Key Terms and Concepts • Brand equity • Comparative advertising • Cost complementarities • Deadweight loss of monopoly • Economies of scale • Multiplant monopoly • Niece marketing • Patents • Product differentiation 2-