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Part Two: Market StructureLecture 1
Marketing (425 AEC)
Dr. Mahmoud Arafa
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This lecture focus on
Market Structure Identification.
Comparing Four Market Structures.
Characteristics Of Perfect CompetitionMarket.
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Market Structure The selling environmentin 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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Market Structure Market structure identifies how a market
is made up in terms of:
The number of firms in the industry The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms behaviour pricing strategies, non-price competition,output levels
The extent of barriers to entry
The impact on efficiency
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Introduction
More competitive (fewer imperfections)
Perfect
CompetitionPure
Monopoly
Perfect competition, with an infinite number of firms, andmonopoly, with a single firm, are polar opposites (Q).
Monopolistic competition and oligopoly lie between thesetwo extremes.
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Market Structure
Perfect
Competition
Pure
Monopoly
Monopolistic Competition Oligopoly Duopoly Monopoly
The further right on the scale, the greater the degreeof monopoly power exercised by the firm.
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Market StructureCharacteristics: Look at these everyday products whattype of market structure are the producers of theseproducts operating in? (Just to think about)
Remember to thinkabout the nature of theproduct,entry and exit,behaviour of the firms,number and size of the
firms in the industry.You might even have toask what the industryis??
Canon SLR CameraBananas
Mercedes CLK Coupe
ElectricGuitarJazz Body
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Perfect Competition MonopolisticCompetition Oligopoly Monopoly
Number of Firms Very Many Many / Several Few One
Freedom of Entry Unrestricted Unrestricted Restricted Restricted orCompletely Blocked
Nature of Product Homogeneous Differentiated Undifferentiated orDifferentiated Unique
Implications of
Demand CurveHorizontal: Firm is a
price takerDownward Sloping
but Relatively Elastic
Downward Sloping.
Kinked Shape.
Relatively Inelastic.
(Shape depends on
rivals reactions)
Downward Sloping
More Inelastic Than
Oligopoly. Firm Has
Considerable Control
Over Price.
Comparing Market Structures
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Average Size ofFirms
Small and Large
(Economies of scalewill encourage
growth)Small and Large Large Small or Large
Possible
Consumer
DemandElastic
Elastic, Firms face
Individual Demand
curves
Consumer demands
factors
include advertising
and pricing from rivalfirms
Consumers are
limited to one choice
Profit Making
Possibility Normal Profits Normal ProfitsNormal and Economic
Profit(Depends on
reactions of price
setting by rivals)
Economies of Scale.
Normal and Economic
Profits in short and
Long Run
Comparing Market StructuresPerfect Competition Monopolistic
Competition Oligopoly Monopoly
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Comparing Market Structures
GovernmentIntervention Price Floors andCeilings Government MayLimit Entry Highly UnregulatedResulting in Cartels
Anti-Monopoly
Legislation. Profits
Taxes. Sales Taxes.
Price Setting.
Nationalization
EfficiencyProductively (P=Min
AC) and AllocativelyEfficient (P= MC)
Productively and
Allocatively Inefficient
Productively and
Allocatively
Inefficient.
Technological
Development May
Push Costs Down
Productively and
Allocatively Inefficient
Examples Corn, Onions,Broccoli
Gas Stations,
Convenience Stores,
Night Clubs
Cable, Phone and
Internet ProvidersPublic Transit,
Utilities
Perfect Competition MonopolisticCompetition Oligopoly Monopoly
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Perfect CompetitionA perfectly competitive market has
the following characteristics:
1. The product of any one seller is the same asthe product of any other seller. The price
then is , buyers do not carewhether they purchase the product from oneseller or another.
the same
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Perfect CompetitionA perfectly competitive market has
the following characteristics:
2. Each participant in the market, seller or buyer,to be so small , in relation to the entire market,
then he/she can not affects the product's price.But if all producers act together, changes in output will certainly affect the price. This mean thatthe firm's demand is horizont.al.
small
the product's price
Horizontal.
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Perfect Competition
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Perfect Competition
3. All Resources be completely mobile (enter orleave the market) and switch from one useto another. For example, Labor must be ableto move from region to region and from jobto job..
mobile
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Perfect Competition
4. consumer, firms, and suppliers have perfectinformation ofthe relevant economic andtechnological data.
consumer Aware of All prices
suppliers Aware of How much their resources will bring in all possibleuses
Firms Aware ofKnow the prices of all inputs and thecharacteristics of all relevant technologies.
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Perfect Competition
Having described these four requirements, it is
obvious that no industry is perfect competition.
Question: there are no industry is perfect
competition (Discuss). Mention the perfectcompetition market characteristics
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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 = (PXQ)
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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, marginalrevenue equals the price of the
good.
MR = P
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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 $6.00
2 $6.00 $12.00 $6.00 $6.00
3 $6.00 $18.00 $6.00 $6.00
4 $6.00 $24.00 $6.00 $6.00
5 $6.00 $30.00 $6.00 $6.00
6 $6.00 $36.00 $6.00 $6.007 $6.00 $42.00 $6.00 $6.00
8 $6.00 $48.00 $6.00 $6.00
QTR /
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TC TR
0
T
otalcost,reven
ue
$385
350
315
280
245
210
175
140
105
70
35
Quantity1 2 3 4 5 6 7 8 9
Profit Determination Using Total Cost and Revenue Curves
Maximum profit =$81
$130
Loss
LossProfit
Profit =$45
/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Profit-Maximizing Level of Output
Marginal revenue(MR) the change intotal revenue associated with a change inquantity.
Marginal cost(MC) the change in totalcost associated with a change in quantity.
A firm maximizes profit when MC= MR.
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How to Maximize Profit
IfMRdoes not equal MC, a firm can
increase profit by changing output. TR/ Q TC/ Q
The supplier will continue to produce aslong as MC is less than MR.
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How to Maximize Profit
The supplier will cut back on
(Decreases) Production ifMCis greaterthan MR.
Thus, the profit-maximizing condition of acompetitive firm is MC = MR = P.
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Profit is maximizedwhen MR=MC.
If the cost ofproducing one moreunit is less than therevenue it generates,then a profit is
available for the firmthat increasesproduction by oneunit.
Profit Maximization: Using MR and MC curves
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If the cost ofproducing one more
unit is more than therevenue it generates,then increasingproduction reduces
profit.
Profit Maximization: Using MR and MC curves
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Question: Discuss using MC, MR, and outputcurves, that the profit-maximizingcondition of a competitive firm is MC
= MR = P.
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Profit Maximization By 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=MC
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The Marginal Cost Curve Is the Supply Curve
P, C P
Q FQ
M
a
b
c
d
A
B
q1q2q3q4 Q1 Q2
MC
P=MR0
ATC
P=MR1AVC
S1
S2
D0
$10
TC =$7
10 units
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MC, ATC, AVC curves
Q
0
Costs
and
Revenue MC
ATC
AVC
The marginal
cost curve is thefirm's supplycurve above the
point where priceexceeds averagevariable cost.
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Determining Profit and Loss
Q
0
Costs
and
Revenue
MC
P
Find output
where MC = MR (P).
The intersection ofMC= MR(P) determinesthe quantity the firm willproduce if it wishes tomaximize profits.
MR
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Determining Profit and Loss
Q
0
Costs
and
Revenue
MC
ATCMR = P2
Q2
Find profit
Drop a line down fromwhere MC equals MR,and then to the ATCcurve.
This is the profit per
unit.
Extend a line back tothe vertical axis toidentify total profit.
MR =P1
MR
Total Profit
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Determining Profit and Loss
The firm makes aprofit when the
ATC curve isbelow the MRcurve.
Inverse
The firm incurs aloss when the ATCcurve is above theMR curve.
Q0
Costs
and
Revenue MC
ATCMR = P2
Q2
MR =P1
MR
Total Profit
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Zero profit
Zero profit or loss where MC=MR.
Firms can earn zero profit or even a loss where MC =MR.
Remember that:
Profit = TR - TC Profit per unit = MR - MC
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Determining Profit and Loss
From a Table of Costs
Profit can be calculated from a table ofcosts and revenues.
Profit is determined by total revenueminus total cost.
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P = MR Output Total CostMarginal
CostAverageTotal Cost
TotalRevenue
ProfitTR-TC
0 40.00 0 40.00
35.00 1 68.00 28.00 68.00 35.00 33.00
35.00 2 88.00 20.00 44.00 70.00 18.00
35.00 3 104.00 16.00 34.67 105.00 1.00
35.00 4 118.00 14.00 29.50 140.00 22.0035.00 5 130.00 12.00 26.00 175.00 45.00
35.00 6 147.00 17.00 24.50 210.00 63.00
Costs Relevant to a Firm
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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P = MR Output Total CostMarginal
Cost
Average
Total Cost
Total
Revenue
Profit
TR-TC
35.00 4 118.00 14.00 29.50 140.00 22.00
35.00 5 130.00 12.00 26.00 175.00 45.00
35.00 6 147.00 17.00 24.50 210.00 63.00
35.00 7 169.00 22.00 24.14 245.00 76.00
35.00 8 199.00 30.00 24.88 280.00 81.0035.00 9 239.00 40.00 26.56 315.00 76.00
35.00 10 293.00 54.00 29.30 350.00 57.00
Costs Relevant to a Firm
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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(a) Profit case (b) Zero profit case (c) Loss case
Determining Profit and Loss From a Graph
Quantity Quantity Quantity
Price
6560
55504540353025201510
50
6560
55504540353025201510
50
1 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 ATC
AVC
E
Profit
C
MC
ATC
AVC
MC
ATC
AVC
Loss
6560
55504540353025201510
50
1 2 3 4 5 6 7 8 910 12
P = MR
P = MR
Price Price
The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
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MC
P = MR
2 4 6 8 Quantity
Price
60
50
40
30
20
10
0
ATC
AVC
Loss
The Firm's Shutdown DecisionThe shutdown pointis the point below which
the firm will be better offif it shuts down than itwill if it stays inbusiness
Shut down ifTR < TVCShut down ifMR < MC
Shut down ifP < ATC
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The Firms Decision to Enter a Market
A firm will enter the industry if such an actionwould be profitable.
TR > TVCMR > MC
P > ATC
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