Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Managerial Economics in a Global Economy, 5th EditionbyDominick SalvatoreChapter 8Market Structure: Perfect Competition, Monopoly and Monopolistic Competition

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Market StructurePerfect CompetitionMonopolistic CompetitionOligopolyMonopolyMore CompetitiveLess Competitive

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect CompetitionMany buyers and sellersBuyers and sellers are price takersProduct is homogeneousPerfect mobility of resourcesEconomic agents have perfect knowledgeExample: Stock Market

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Monopolistic CompetitionMany sellers and buyersDifferentiated productPerfect mobility of resourcesExample: Fast-food outlets

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *OligopolyFew sellers and many buyersProduct may be homogeneous or differentiatedBarriers to resource mobilityExample: Automobile manufacturers

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *MonopolySingle seller and many buyersNo close substitutes for productSignificant barriers to resource mobilityControl of an essential inputPatents or copyrightsEconomies of scale: Natural monopolyGovernment franchise: Post office

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect Competition:Price Determination

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect Competition:Price Determination

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect Competition:Short-Run EquilibriumFirms Demand Curve = Market Price= Marginal RevenueFirms Supply Curve = Marginal Costwhere Marginal Cost > Average Variable Cost

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect Competition:Short-Run Equilibrium

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect Competition:Long-Run EquilibriumPrice = Marginal Cost = Average Total CostQuantity is set by the firm so that short-run:At the same quantity, long-run:Price = Marginal Cost = Average CostEconomic Profit = 0

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Perfect Competition:Long-Run Equilibrium

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Competition in theGlobal EconomyDomestic SupplyDomestic DemandWorld Supply

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Competition in theGlobal EconomyForeign Exchange RatePrice of a foreign currency in terms of the domestic currencyDepreciation of the Domestic CurrencyIncrease in the price of a foreign currency relative to the domestic currencyAppreciation of the Domestic CurrencyDecrease in the price of a foreign currency relative to the domestic currency

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Competition in theGlobal EconomyDemand for EurosSupply of EurosR = Exchange Rate = Dollar Price of Euros/

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *MonopolySingle seller that produces a product with no close substitutesSources of MonopolyControl of an essential input to a productPatents or copyrightsEconomies of scale: Natural monopolyGovernment franchise: Post office

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *MonopolyShort-Run EquilibriumDemand curve for the firm is the market demand curveFirm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR)Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *MonopolyShort-Run EquilibriumQ* = 500P* = $11

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *MonopolyLong-Run EquilibriumQ* = 700P* = $9

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Social Cost of Monopoly

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Monopolistic CompetitionMany sellers of differentiated (similar but not identical) productsLimited monopoly powerDownward-sloping demand curveIncrease in market share by competitors causes decrease in demand for the firms product

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Monopolistic CompetitionShort-Run Equilibrium

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Monopolistic CompetitionLong-Run EquilibriumProfit = 0

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide *Monopolistic CompetitionLong-Run EquilibriumCost without selling expensesCost with selling expenses