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Chapter 8

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  1. Chapter 8 Types of Market Structure in the Construction Industry

  2. Markets and the Competitive Environment Economists identify four market types: 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly

  3. Markets and the Competitive Environment 1. Perfect competition Arises when there are many firms each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry.

  4. Markets and the Competitive Environment 2. Monopolistic competition A market structure in which a large number of firms compete by making similar buy slightly different products. Product differentiation gives a monopolistically competitive firm an element of monopoly power.

  5. Markets and the Competitive Environment 3. Oligopoly A market structure in which a small number of firms compete.

  6. Markets and the Competitive Environment 4. Monopoly An industry that produces a good or service for which no close substitutes exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms.

  7. Perfect Competition Characteristics of Perfect Competition • Many firms, each selling an identical product. • Many buyers. • No restrictions on entry into the industry.

  8. Perfect Competition Characteristics of Perfect Competition • Firms in the industry have no advantage over potential new entrants. • Firms and buyers are well informed about prices of the products of each firm in the industry.

  9. Perfect Competition As a result of these characteristics, perfect competitors are price takers. Price takers Firms that cannot influence the price of a good or service.

  10. Economic Profit and Revenue Thefirm’s goal is to maximize economic profit. Total cost is the opportunity cost -- including normal profit.

  11. Economic Profit and Revenue Total revenue is the value of a firm’s sales. • Total revenue = P  Q Marginal revenue(MR) • Change in total revenue resulting from a one-unit increase in quantity sold. Average revenue(AR) • Total revenue divided by the quantity sold—revenue per unit sold. In perfect competition, Price = MR = AR

  12. The Firm’s Decisions inPerfect Competition A firm’s task is to make the maximum economic profit possible, given the constraints it faces. In order to do so, the firm must make two decisions in the short-run, and two in the long-run.

  13. The Firm’s Decisions inPerfect Competition Short-run A time frame in which each firm has a given plant and the number of firms in the industry is fixed Long-run A time frame in which each firm can change the size of its plant and decide to enter the industry.

  14. The Firm’s Decisions inPerfect Competition In the short-run, the firm must decide: • Whether to produce or to shut down. • If the decision is to produce, what quantity to produce.

  15. The Firm’s Decisions inPerfect Competition In the long-run, the firm must decide: • Whether to increase of decrease its plant size. • Whether to stay in the industry or leave it. We will first address the short-run.

  16. TC Economic loss Economic profit = TR - TC Economic loss Total Revenue, Total Cost,and Economic Profit TR 300 Total revenue & total cost (dollars per day) 225 183 100 0 4 9 12 Quantity (sweaters per day)

  17. Economic profit Economic loss Profit maximizing quantity Total Revenue, Total Cost,and Economic Profit Economic profit/loss 42 Profit/loss (dollars per day) 20 0 Quantity (sweaters per day) 4 9 12 -20 Profit/ loss -40

  18. Marginal Analysis Using marginal analysis, a comparison is made between a units marginal revenue and marginal cost.

  19. Marginal Analysis If MR > MC, the extra revenue from selling one more unit exceeds the extra cost. • The firm should increase output to increase profit. If MR < MC, the extra revenue from selling one more unit is less than the extra cost. • The firm should decrease output to increase profit. If MR = MC economic profit is maximized.

  20. Profit- maximization point MC Loss from 10th sweater MR Profit from 9th sweater Profit-Maximizing Output 30 25 Marginal revenue & marginal cost (dollars per day) 20 10 0 8 9 10 Quantity (sweaters per day)

  21. The Firm’s Short-Run Supply Curve Fixed costs must be paid in the short-run. Variable-costs can be avoided by laying off workers and shutting down. Firms shut down if price falls below the minimum of average variable cost.

  22. MC = S MR2 MR1 Shutdown point AVC s MR0 A Firm’s Supply Curve 31 Marginal revenue & marginal cost (dollars per day) 25 17 0 7 9 10 Quantity (sweaters per day)

  23. S s A Firm’s Supply Curve 31 Marginal revenue & marginal cost (dollars per day) 25 17 0 7 9 10 Quantity (sweaters per day)

  24. Short-Run Industry Supply Curve Short-run industry supply curve Shows the quantity supplied by the industry at each price when the plant size of each firm and the number of firms remain constant. It is constructed by summing the quantities supplied by the individual firms.

  25. END