market structure- micro economics
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DESCRIPTION
The selling environment in which a firm produces and sells its product is called a market structure.* Defined by three characteristics: The number of firms in the market The ease of entry and exit of firms The degree of product differentiationTRANSCRIPT
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Market Structure
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Market Structure• The selling environment in which a firm
produces and sells its product is called a market structure.
• Defined by three characteristics:
– The number of firms in the market
– The ease of entry and exit of firms
– The degree of product differentiation
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Introduction
• Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites.
• Monopolistic competition and oligopoly lie between these two extremes.
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Perfect Competition 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.
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The Meaning of Competition
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.
Thus, each buyer and seller is a price taker.
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Perfect Competition
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Profit-Maximizing Level of Output• The goal of the firm is to maximize
profits.
• Profit is the difference between total revenue and total cost.
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Revenue of a Competitive Firm
Total revenue for a firm is the selling price times the quantity sold.
TR = (P X Q)
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Revenue of a Competitive Firm
Marginal revenue is the change in total revenue from an additional
unit sold.
MR =TR/ Q
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Revenue of a Competitive Firm
For competitive firms, marginal revenue equals the price of the
good.
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Total, Average, and Marginal Revenue for a Competitive Firm
Quantity(Q)
Price(P)
Total Revenue(TR=PxQ)
Average Revenue(AR=TR/ Q)
Marginal Revenue(MR= )
1 $6.00 $6.00 $6.002 $6.00 $12.00 $6.00 $6.003 $6.00 $18.00 $6.00 $6.004 $6.00 $24.00 $6.00 $6.005 $6.00 $30.00 $6.00 $6.006 $6.00 $36.00 $6.00 $6.007 $6.00 $42.00 $6.00 $6.008 $6.00 $48.00 $6.00 $6.00
QT R /
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TC TR
0
Tot
al c
ost,
rev
enue
$385350315280245210175140105
7035
Quantity1 2 3 4 5 6 7 8 9
Profit Determination Using Total Cost and Revenue Curves
Maximum profit =$81
$130
Loss
Loss
Profit
Profit =$45
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Profit Maximization Using Total Revenue and Total Cost• Profit is maximized where the vertical
distance between total revenue and total cost is greatest.
• At that output, MR (the slope of the total revenue curve) and MC (the slope of the total cost curve) are equal.
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Profit-Maximizing Level of Output• Marginal revenue (MR) – the change
in total revenue associated with a change in quantity.
• Marginal cost (MC) – the change in total cost associated with a change in quantity.
• A firm maximizes profit when MC = MR.
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How to Maximize Profit
• If marginal revenue does not equal marginal cost, a firm can increase profit by changing output.
• The supplier will continue to produce as long as marginal cost is less than marginal revenue.
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How to Maximize Profit
• The supplier will cut back on production if marginal cost is greater than marginal revenue.
• Thus, the profit-maximizing condition of a competitive firm is MC = MR = P.
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Again! MR=MC
• Profit is maximized when MR=MC.– If the cost of producing one more unit is
less than the revenue it generates, then a profit is available for the firm that increases production by one unit.
– If the cost of producing one more unit is more than the revenue it generates, then increasing production reduces profit.
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Profit Maximization: Using MR and MC curves
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Profit Maximization: The Numbers
Q P TR TC TR-TC MR MC ATC
0 $1 $0 $1.00 -$1.00 $1
1 $1 $1 $2.00 -$1.00 $1 $1.00 $2.00
2 $1 $2 $2.80 -$0.80 $1 $0.80 $1.40
3 $1 $3 $3.50 -$0.50 $1 $0.70 $1.17
4 $1 $4 $4.00 $0.00 $1 $0.50 $1.00
5 $1 $5 $4.50 $0.50 $1 $0.50 $0.90
6 $1 $6 $5.20 $0.80 $1 $0.70 $0.87
7 $1 $7 $6.00 $1.00 $1 $0.80 $0.86
8 $1 $8 $6.86 $1.14 $1 $0.86 $0.86
9 $1 $9 $7.86 $1.14 $1 $1.00 $0.87
10 $1 $10 $9.36 $0.64 $1 $1.50 $0.94
11 $1 $11 $12.00 -$1.00 $1 $2.64 $1.09
MR=MCMR=MC
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The Marginal Cost Curve Is the Supply Curve• The marginal cost curve is the firm's
supply curve above the point where price exceeds average variable cost.
• The MC curve tells the competitive firm how much it should produce at a given price.
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The Interaction of Firms and Markets
FirmFirm MarketMarketPricePriceAndAnd
CostsCostsPricePrice
qqFF QQMM
aa
bb
cc
dd
AA
BB
qq11qq22qq33qq44 QQ11 QQ22
MCMC
P=MRP=MR00
ATCATC
P=MRP=MR11AVCAVC
SS11
SS22
DD00
$10$10
ATCATC=$7=$7
10 units10 units
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The Marginal-Cost Curve and the Firm’s Supply Decision...
Quantity0
Costsand
RevenueMC
ATC
AVC
Q1
P1
P2
Q2
This section of the firm’s MC curve is also the firm’s supply curve (long-run).
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Determining Profit and Loss• Find output where MC = MR.
– The intersection of MC = MR (P) determines the quantity the firm will produce if it wishes to maximize profits.
• Find profit per unit where MC = MR.– Drop a line down from where MC equals MR,
and then to the ATC curve.– This is the profit per unit.– Extend a line back to the vertical axis to
identify total profit.
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Determining Profit and Loss• The firm makes a profit when the ATC
curve is below the MR curve.• The firm incurs a loss when the ATC curve
is above the MR curve.
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Determining Profit and Loss From a Graph• Zero profit or loss where MC=MR.
– Firms can earn zero profit or even a loss where MC = MR.
– Even though economic profit is zero, all resources, including entrepreneurs, are being paid their opportunity costs.
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(a) Profit case (b) Zero profit case (c) Loss case
Determining Profits Graphically
Quantity Quantity Quantity
Price65 60 55 50 45 40 35 30 25 20 15 10
5 0
65 60 55 50 45 40 35 30 25 20 15 10
5 01 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12
D
MC
A P = MR
B ATCAVC
E
Profit
C
MC
ATC
AVC
MC
ATC
AVC
Loss
65 60 55 50 45 40 35 30 25 20 15 10
5 0 1 2 3 4 5 6 7 8 910 12
P = MRP = MR
Price Price
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
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Loss MinimizationAverage cost of a unit of outputAverage cost of a unit of output
Revenue Revenue generated by a generated by a unit of outputunit of output
Market Market price price fallsfalls
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The Firm’s Short-Run Decision to Shut Down The firm shuts down if the revenue it
gets from producing is less than the variable cost of production.
Shut down if TR < VC
Shut down if TR/Q < VC/Q
Shut down if P < AVC
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The Shutdown Point
• If total revenue is more than total variable cost, the firm’s best strategy is to temporarily produce at a loss.
• It is taking less of a loss than it would by shutting down.
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MC
P = MR
2 4 6 8 Quantity
Price
60
50
40
30
20
10
0
ATC
AVC
Loss
A$17.80
The Shutdown Decision
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The Firm’s Long-Run Decision to Exit or Enter a Market In the long-run, the firm exits if the
revenue it would get from producing is less than its total cost.
Exit if TR < TC
Exit if TR/Q < TC/Q
Exit if P < ATC
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The Firm’s Long-Run Decision to Exit or Enter a Market A firm will enter the industry if such an
action would be profitable.
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC