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ECON 308

ECON 308. Week 6 Chapter 6: Market Structure. Market structure: Objectives. Students should be able to Differentiate among the four archetypal market structures Distinguish between price takers and price searchers. Market structure. What is a market?

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ECON 308

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  1. ECON 308 Week 6 Chapter 6: Market Structure

  2. Market structure:Objectives • Students should be able to • Differentiate among the four archetypal market structures • Distinguish between price takers and price searchers

  3. Market structure • What is a market? • All firms and individuals willing and able to buy or sell a particular product • What is market structure? • Defined by attributes of the market environment

  4. Demand Facing the Firm $P $P $P $P D1 D3 D4 D2 Q Q Q Q  Increasing degrees of Competition   Increasing degrees of Market Power 

  5. Market structurethe archetypes • Monopoly • Oligopoly • Monopolistic competition • Perfect competition

  6. Alternative Market Structures The Most Competitive Case: The Price Taker Firm

  7. Perfect competition = Price TakerCharacteristics • Many buyers and sellers • Product homogeneity • Low cost and accurate information • Free entry and exit • Best regarded as a benchmark

  8. Market and Firm Demand $P $P Firm Market D S Pe Pe D S D Q/T Qe Q/T

  9. Firm supply • Short run • Marginal cost curve above average variable cost • P* = SRMC • Long run • Long-run marginal cost curve above long-run average cost

  10. Price Taker Firm $ P MC Price = Marginal Revenue Pe D= MR Profit Maximizing Rate of output Qe Q/T

  11. Total Revenue = Pe x Qe $ P MC Pe D Total Revenue Qe Q/T

  12. Total Cost = AC x Q $ P MC AC Pe D AC at Qe Total Cost Qe Q/T

  13. Profit = TR - TC $ P MC AC Pe D Q Q/T

  14. Profits occur if (P=MC) > AC $ P MC AC Pe D= MR Qe Q/T

  15. Market Response to Profits $P D So S’ Pe P’ D So Qx/T Qe Q’

  16. Price Taker Firm: Zero Profits $ P MC ATC D Pe’ D’= MR Qe Q/T

  17. Price Taker Firm: Loss $ P ATC MC Loss Pe D= MR Qe Q/T

  18. Market Response to Losses $P D S’ So P’ Po D S’ Qx/T Q’ Qo

  19. Price Taker Firm: Zero Profits $ P MC ATC Pe’ D’= MR Po D Qe Q/T

  20. Implications of Price-Taker Industry • Demand for the firm is horizontal at the market price • Efficiency: Price equals marginal cost of production • Competition drives price to equal Average cost • Economic profits only exist in the short-run.

  21. Long-Run Industry Equilibrium $P $P Firm Market MC D S ATC Pe Pe D S D Q/T Qe Qe Q/T

  22. Incumbent reactions Specific assets Economies of scale Excess capacity Reputation effects Incumbent advantages Precommitment contracts Licenses and patents Learning-curve effects Pioneering brand advantages Sources of Market Power:Barriers to entry

  23. Monopoly • Strong barriers to entry  single supplier • Profit maximization • faces market demand and sets MR=MC • Unexploited gains from trade

  24. Oligopoly • A few firms produce most market output • Products may or may not be differentiated • Effective entry barriers protect firm profitability • Firm interdependence requires strategic thinking

  25. Monopolistic competition • Multiple firms produce similar products • Firms face downsloping demand curves • Profit maximization occurs where MC=MR • In the limit, firms compete away economic profits

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