Market
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Market. Model. Review. I. Pure Competition. $. $. S. d, p, mr. D. X. 0. q. 0. On the left side of the diagram we see the standard market. Equilibrium is at the point where the quantity demanded is the same as the quantity supplied. Nothing new here!. $. $. MC AC. d, p, mr.

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Market

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Market

Market

Model

Review


Market

I. Pure Competition


Market

$

$

S

d, p, mr

D

X

0

q

0

  • On the left side of the diagram we see the standard market.

  • Equilibrium is at the point where the quantity demanded is the same as the quantity supplied. Nothing new here!


Market

$

$

MC AC

d, p, mr

X

0

q

0

  • On the right side we have the picture of just one firm of a great number of firms. It can be representative of all the others, since all are price takers: they simply accept the market price.


Pure competition

Pure Competition

  • Note that in economics, costs include normal opportunity cost returns (e.g., market salaries and stock investments) for all factors of production.

  • When all costs are covered, the firm is making a normal profit.

  • A “pure” or “economic” profit is large enough to allow greater than market returns to factors or provide for net investment in the firm.


Market

$

$

d, p, mr

X

0

q

0

  • Characteristics of Pure Comp:

  • Many firms,

  • A homogenous product, and

  • No barriers to exit and entrance.

  • Entry is the automatic response to the profit incentive.


Market

$

$

d, p, mr

X

0

q

0

  • Results? Efficiency.

  • Easy market access (entry) denies long-term pure profit.

  • Dtemporary NR  entry  Sand price adjustment  efficiency, since P=AC


Market

II. Monopoly


Market

MONOPOLY

  • The monopolist (compare to pure competition) is the only seller facing the industry-wide demand curve.

  • The monopolist can often make profit by restricting output and raising the price. (Sliding to the left, back up the demand curve.)


Market

$

ac

mc

mr

D=ar

0

Q

MONOPOLY

  • Here we see the monopolist maximizing profit by equating MC and MR.

  • MC is the cost of selling 1 more unit. MR is the revenue from selling 1 more unit.

  • We can gain no more revenue than by equating MC and MR. This can be seen by….


Market

MONOPOLY

  • How to maximize profits. Select the output and price that make TR as much greater than TC as possible.

Note where TC and TR

diverge, and, after Q*,

converge. They are

furthest apart at Q*.

$

TC

TR

Note the slopes of

TC and TR. They are

MC and MR, and are

equal at Q*.

Q

Q*

NR


Market

III. Oligopoly


Market

Oligopoly

  • Oligopolies have a small number of firms (2 to 5 perhaps)

  • “Few Sellers”


Market

Oligopoly

  • Interdependence -- The battle for market share leads to uncertainty.

    • -- If an oligopolist tries to increase market share, what will be the competitors’ response? Price wars and non-price competition (through product differentiation).

  • Many models are used to reflect the oligopoly situation, since there are many reactions to uncertainty.


Market

Oligopoly

$

$

Cartel

TR Max with Π constraint

mc

Min 

mr

0

0

Q

Q

  • The many models of oligopoly, reflect differing reactions to uncertainty in different kinds of oligopoly industries.

  • Where oligopolists collude to flee uncertainty and to secure greater profits, cartels may be formed.


Market

$

$

Cartel

TR Max with Π constrant

mc

Min 

mr

0

0

Q

Q

Oligopoly

  • Otherwise, firms tend to avoid price wars and compete through product differentiation.


Market

IV. Monopolistic Competition


Market

Monopolistic Competition

$

ac

mc

0

Q

  • Several firms (10 to 20 perhaps): enough so no interdependence.

  • Great importance of many retail items (even where production is on oligopoly basis) and for service firms.


Market

$

ac

mc

0

Q

Monopolistic Competition

  • Differentiation and product groups.

  • Entry pushes D downward until AC just rests on the demand curve.

  • Long-run profit can exist only if entry is blocked. This can be done through licensing.


Market

Monopolistic Competition

  • Notice that additional firms joining the product group (entry) will lead to a shifting of the demand curve downward or to the right. This works just as it does in pure competition.

With entry, S shifts out and the Firm’s D curve (price line) falls


Market

Monopolistic Competition

With entry, D also falls

here until costs are just

covered.

With entry, S shifts out and the Firm’s D curve (price line) falls


Market

Porter's Forces

  • The competitive environment differs distinctly depending on which of these models holds for a given firm.

  • As Michael Porter has shown, there are extensive forces of competition confronting nearly all firms as part of their environment. These forces emanate from:

  • firms in other industries offering substitute products,

  • potential new entrants,

  • buyers with monopsony power,

  • suppliers of key inputs.


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