Market Structures: Introduction Introduction (from ch 14, 15, 16) A firm¶s production decisions depend on Rule: if P < AVC then temporarily _____________________ _________________ ____ if P > AVC then produce the quantity where _____________________
Comparing price and average total cost determines a firm¶s _____________________. if P < ATC the firm earns a loss loss if P = ATC the firm firm breaks even if P > ATC the firm firm earns a profit The price that a firm can charge depends on - what kind of product it produces - how much competition it faces
I. There are 4 basic types of markets: 1. Competitive 2. Monopoly 3. Monopolistic Competition 4. Oligopoly We will characterize each type of o f market according to the following factors: - number of firms - type of product - barriers to entry 1. Competitive Market Characteristics Characteristics (aka perfect perfect competition) competition) - __________firms (none of them dominate the market) - products are roughly the ____________ (aka homogeneous) - ________________ _______________ _ barriers to entry (new firms can easily enter this market)
Ex: rice farmers in east Asia Asia - many, many rice farmers - one farmer¶s rice isn¶t distinguishable from another farmer¶s rice - no significant barriers to starting a rice-growing business
2. Monopoly Market Characteristics Characteristics - ___________________ - unique product (could be be geographically unique or something without close substitutes) - __________________barriers _______________ ___barriers to entry (other firms are prevented from entering this market)
The fundamental cause of a monopoly is ________________________________. a. __________________________ or control of a key resource that is used in the production of the good e.g. DeBeers diamonds b. _____________________ = government grants an exclusive right to sell some good or service e.g. Lipitor Lipitor (exp 11/2011) c. ____________________________ = due to economies of scale, a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms firms e.g. one water company per city city
3. Monopolistic Competition Characteristics Characteristics - _________________ firms - ________________________ product product (advertising is important) - __________________ barriers to entry
This is an industry where there is substantial co mpetition for the good itself, but firms differentiate their product by branding. Ex: blue jeans - no real barriers to entry to produce - hundreds of firms produce blue jeans - the GAP has a monopoly on GAP brand jeans - Levis has a monopoly on Levis brand jeans ³competition on the item, monopoly on the brand´
4. Oligopoly Market Characteristics - _____________ firms (more (more than 1, less than many) - identical or differentiated products - _________________ barriers to entry Ex: automobile makers for the US: GM, Ford, Ford, Toyota, Toyota, Volkswagon, Hyundai, Nissan, Honda, Chrysler Chrysler - sell similar but but differentiated differentiated products Toyota Corolla vs Nissan Sentra Chevy Blazer vs GMC Jimmy - high barriers to entry (the start up capital would would be huge« factories, engineers, engineers, supply chain«) Ex: Oil Industry - Dominated Dominated by a few few firms: firms: ExxonMobil, Royal Dutch Shell, BP, Chevron and and ConocoPhillips - Sell a homogeneous product. - High High barriers barriers to entry: entry: start up capital, capital, mineral mineral rights rights
Ranking the types of markets from most competitive to least competitive:
II. Competition and Prices When it comes to setting setting price: A firm in a competitive market must simply accept the market price as given. - many, many other ot her firms - selling the same product - new firms can enter at will A firm in this type of market is a ³________________________´.
A monopolistic competitor can determine what price to charge for their good, but they keep in mind: - face competition from similar products - consumers¶ willingness to pay Ex: Dove can set set the price for for its body body wash « but it it can¶t control the price for body wash in general.
In an oligopoly market , the ability to set price depends dep ends on the type of go od being sold. ex: oil has one price ex: car makers can set prices for for different models models Because there are only o nly a few firms in an oligopoly market, strategy is incredibly important.
A monopolist can determine what price to charge for its good goo d because it faces no competition. ³price maker´ ³price setter´ A monopolist, however, can¶t set the price infinitely high. - can only set it as high as demand will allow
The level of competition would suggest to us that the type of market structure would impact ________________________________________________. a. A firm in a competitive market will have more elastic demand than a monopoly market. D, competitive > D, monopoly - many close substitutes in competitive market - no substitutes in monopoly market
b. A firm in a monopolistic monopo listic competition market is likely to face a more e lastic demand curve than a monopoly and a more inelastic curve than perfect competition. D, competitive > D, mono comp > D, monopoly - ___________________will make people¶s demand more inelastic (brand loyalty) than a competitive market - availability of substitutes will make people¶s demand more e lastic than for a monopoly good.
c. Price elasticity of demand for an oligopoly good depends on the good.
III. Recap of Firm¶s Profits A. Costs TC = TFC + TVC ATC = AFC + AVC ATC = TC / Q AFC = TFC / Q AVC = TVC / Q MC = change in TC change in Q
B. Revenue TR = P x Q MR = change in TR change in Q Average Revenue = TR / Q
C. Shut Down and Break Even If P < AVC, then temporarily shut down.
(loss equal to fixed fixed cost)
If P > AVC, the pro duce the quantity where MR = MC. If P < ATC, earn a loss. (exit in the long run) If P = ATC, break even. even. If P > ATC, earn a profit. profit. (firms (firms will enter if there there are no barriers) barriers)
We would expect that firms firms in competitive and monopolistically competitive market would ____________________________ in the long run. We would expect that firms in oligopoly or monopoly market would earn ______________________ in the long run.
D. Firm¶s Supply An individual firm¶s short run supply curve is the po rtion of the MC curve that is above the t he AVC curve. An individual firm¶s long run supply curve is the portion of the MC curve that t hat is above the ATC curve.