Principles of Microeconomics - Overview Market Structures

8/3/2019 Principles of Microeconomics - Overview Market Structures

1/28

Market Structures: Introduction

Dr. Katherine Sauer

Principles of Microeconomics

ECO 2020


2/28

Overview:

I. Types of Market Structures

II. Price and Competition

III. Recap of Firms Profits


3/28

Rule:

if P < AVC then temporarily shut down

if P > AVC then produce the quantity where MR = MC

A firmsproduction decisions depend on

production costs

products price


4/28

Comparingprice to average total cost determines a

firmsprofits.

if P < ATC the firm earns a loss

if P = ATC the firm breaks even

if P > ATC the firm earns a profit


5/28

Theprice that a firm can charge depends on

- what kind of product it produces

- how much competition it faces


6/28

I. There are 4 basic types of markets:

1. Competitive

2. Monopoly

3. Monopolistic Competition

4. Oligopoly

We will characterize each type of market according to the

following factors:

- number of firms

- type of product

- barriers to entry


7/28

1. Competitive Market Characteristics

(aka Perfect Competition)

many firms (none of them dominate the market)

products are roughly the same (aka homogeneous)

no barriers to entry (new firms can easily enter this

market)


8/28

Ex: rice farmers in east Asia

- many, many rice farmers

- one farmers rice isnt distinguishable from another

farmers rice

- no significant barriers to starting a rice-growing

business


9/28

2. Monopoly Market Characteristics

one firm

uniqueproduct (could simply be geographically

unique or something without close substitutes)

complete barriers to entry (other firms are preventedfrom entering this market)


10/28

The fundamental cause of a monopoly isbarriers to entry.

a. sole ownership or control of a key resource that is usedin the production of the good

e.g. DeBeers diamonds

b.patents = government grants an exclusive right to sellsome good or service

e.g. Lipitor (exp 11/2011)

c. natural monopoly = due to economies of scale, a singlefirm can supply a good or service to an entire market at a

smaller cost than could two or more firms

e.g. one water company per city


11/28

3. Monopolistic Competition Characteristics

many firms

differentiatedproduct (advertising is important)

no barriers to entry


12/28

This is an industry where there is substantial competition

for the good itself, but firms differentiate their product bybranding.

Ex: blue jeans

- no real barriers to entry to produce- hundreds of firms produce blue jeans

- the GAP has a monopoly on GAP brand jeans

- Levis has a monopoly on Levis brand jeans

competition on the item, monopoly on the brand


13/28

4. Oligopoly Market Characteristics

few firms (more than 1, less than many)

identical or differentiated products

high barriers to entry


14/28

Ex: automobile makers for the US: GM, Ford, Toyota,Volkswagon, Hyundai, Nissan, Honda, Chrysler

- sell similar but differentiated products

Toyota Corolla vs Nissan SentraChevy Blazer vs GMC Jimmy

- high barriers to entry

(the start up capital would be huge factories,engineers, supply chain)


15/28

Ex: Oil Industry

- dominated by a few firms: ExxonMobil, Royal Dutch

Shell, BP, Chevron and ConocoPhillips

- sell a homogeneous product

- high barriers to entry: start up capital, mineral rights


16/28

Ranking the types of markets from most competitive to

least competitive:

Most

Competition

Least

Competition

Competitive

Market

Monopoly

Market

Monopolistic

Competition

Market

Oligopoly

Market


17/28

II. Competition and Prices

When it comes to setting price:

A firm in a competitive market must simply accept the

market price as given.

- many, many other firms

- selling the same product

- new firms can enter at will

A firm in this type of market is a price taker.


18/28

A monopolistic competitorcan determine what price to

charge for their good, but they keep in mind:

- face competition from similar products

- consumers willingness to pay

Ex: Dove can set the price for its body wash but it

cant control the price for body wash in general.


19/28

In an oligopoly market, the ability to set price dependson the type of goodbeing sold.

ex: oil has one price

ex: car makers can set prices for different models

Because there are only a few firms in an oligopolymarket, strategy is incredibly important.


20/28

A monopolist can determine what price to charge for its

good because it faces no competition.

price maker price setter

A monopolist, however, cant set the price infinitely high.

- can only set it as high as demand will allow


21/28

The level of competition would suggest to us that the typeofmarket structure would impact price elasticity of

demand.

A firm in a competitive market will have more elasticdemand than a monopoly market.

D, competitive > D, monopoly

- many close substitutes in competitive market

- no substitutes in monopoly market


22/28

A firm in a monopolistic competition market is likely to

face a more elastic demand curve than a monopoly anda more inelastic curve than perfect competition.

D, competitive > D, mono comp > D, monopoly

- advertising will make peoples demand more inelastic

(brand loyalty) than a competitive market

- availability ofsubstitutes will make peoples demand

more elastic than for a monopoly good.


23/28

Price elasticity of demand for an oligopoly good depends

on the good.


24/28

III. Recap of Firms Profits

A. Costs

Average Total Cost

Marginal

Cost

cost per

input

output

Average Variable Cost

TC = TFC + TVC

ATC = AFC + AVC

ATC = TC / Q

AFC = TFC / Q

AVC = TVC / Q

MC = change in TC

change in Q


25/28

B. Revenue

TR = P x Q

MR = change in TR

change in Q

Average Revenue = TR / Q

= P x Q / Q

= P


26/28

C. Shut Down and Break Even

If P < AVC, then temporarily shut down.

loss equal to fixed cost

If P > AVC, the produce the quantity where MR = MC.

If P < ATC, earn a loss. (exit in the long run)

If P = ATC, break even.

If P > ATC, earn a profit. (firms will enter if thereare no barriers)


27/28

We would expect that firms in competitive andmonopolistically competitive market wouldbreak even

in the long run.

We would expect that firms in oligopoly or monopolymarket would earnpositive profits in the long run.


28/28

D. Firms Supply

An individual firms short run supply curve is the portion

of the MC curve that is above the AVC curve.

An individual firms long run supply curve is the portion of

the MC curve that is above the ATC curve.

Documents

Principles of Microeconomics - Overview Market Structures