Chapter 6

• Market structures


  The ways that specific industries and markets are organised, and how firms compete.
• Market structures depend on factors...

  • the number of firms in the industry
  • the similarity of the good or service produced by the firms in the industry
  • the ease with which new firms can enter the industry
• Different market structures

  • perfect competition
  • monopolistic competition
  • oligopoly
  • monopoly
• Perfect competition

  • Many buyers and sellers
  • identical products sold
  • No barriers to entry to new firms entering the market or existing firms exiting the market
  • sellers have no market power
• Price taker


  Have the legal authority to sell it at any price
• Maximising profit in a perfectly competitive market

  To maximise, MR=MC

  If MR>MC, then increasing Q will increase profits

  If MR<MC, then decreasing Q will increase profits
• Max profits (perfectly competitive market): Profit formulas.

  Profit= price * Quantity sold-Total costs

  
  

  Price setter, Profit= P(Q)*Q-TC(Q)

  Price taker, Profit= $P*$$Q-TC(Q)$
• Individual firm's demand curve

  Demand= Marginal revenue

  
• Profit maximising


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• Profit


  Profit= Profit per unit* number of units

  = (P-ATC)*Q
• Profit maximising & Economic profit

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• Supply curve


  Shows the quantity supplied at various prices
• Varying the price (individual firms)

  Demand curve increases or decreases (shifting up or down)

  
• Profit/loss


  Economic profit is between MC and ATC

  Economic loss occurs when MC is below ATC

  
• Break even

  • if P>ATC, there is a positive economic profit
  • If P<ATC, there is an economic loss
  • If P=ATC, the firm breaks even, TC=TR (no loss/profit)
• Produce or shut down- in the short run

  Shut down IF it will maximise profits

  • In the short run, some of the costs are fixed
  • even if you shut down, you will incur the fixed costs in the short run.
  • profit of shutting down in short run= -FC
• Shutdown (short run)


  In short run:
• Shutdown (short run)


  In short run:

  • if P>AVC, the firm should produce
  • if P<AVC, should shut down
  • if P=AVC, would be indifferent, this is the 'shut down point'
• Shutdown (short run graph)


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• The Long run


  Free entry and exit means that...

  • whenever there are positive economic profits, firms will enter the market
  • whenever there are economic losses, firms will exit the market
  • firms will be willing to operate for 0 economic profits
• In perfectly competitive markets, firms will enter markets until the profit=0
• In perfectly competitive markets, firms will exit markets until the breakeven point is reached
• An increase in the demand for a market will result in a decrease in demand for an individual firm.

  
• Constant-cost industry


  An industry in which a firm's average costs do not change as the industry expands (horizontal long-run supply curve)
• Increasing cost industry


  An industry in which a firm's average costs rise as the industry expands (upward-sloping long-run supply curve)
• Decreasing cost industry


  An industry in which a firm's average costs fall as the industry expands (downward-sloping long-run supply curve)
• Different types of efficiency

  Productive efficiency

  • good or service is produced using the least resources

  Allocative efficiency

  • goods are produced that consumers value the most
  • MC=MB

  Dynamic efficiency

  • changes and new technologies are adopted over time to improve productive and allocative efficiency
• Define Monopoly


  There is only one seller of a good or service hat has no close substitutes
• Reasons for a monopoly

  • Intellectual property protections: Patents, Copyright.
  • Gov. mandated: e.g., priv. sector firm running the rail network
  • Control all of a certain resource: e.g., DeBeers- diamonds- own all the diamond mines across the world
  • Network externalities: advantage to all being on the same system- e.g., Apple: blue/green bubble when texting. Exclusive features within the Apple ecosystem
  • Natural monopoly: it is cheaper to have one seller than many- e.g., SA water, produce water at a lower cost than having 2 sellers (have to put more pipes in etc.)
• Profit maximisation in monopolies

  Profit= TR-TC

  Occurs where MR=MC

  The seller will be on the downward sloping market demand curve.
• Market demand= individual firm's demand
• Comparing efficiency between two (different) market structures

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• Natural monopolies DWL and Econ. profits

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