Transcript CHAPTER 8 File

Chapter 8
Types of Market Structure in the
Construction Industry
Markets and the
Competitive Environment
Economists identify four market types:
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
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.
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.
Markets and the
Competitive Environment
3. Oligopoly
A market structure in which a small
number of firms compete.
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.
Perfect Competition
Characteristics of Perfect Competition
– Many firms, each selling an identical
product.
– Many buyers.
– No restrictions on entry into the industry.
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.
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.
Economic Profit and Revenue
The firm’s goal is to maximize
economic profit.
Total cost is the opportunity cost -including normal profit.
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 oneunit increase in quantity sold.
Average revenue (AR)
– Total revenue divided by the quantity sold—
revenue per unit sold.
In perfect competition, Price = MR = AR
The Firm’s Decisions in
Perfect 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.
The Firm’s Decisions in
Perfect 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.
The Firm’s Decisions in
Perfect 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.
The Firm’s Decisions in
Perfect 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.
Total revenue & total cost
(dollars per day)
Total Revenue, Total Cost,
and Economic Profit
TC
TR
300
Economic
loss
225
Economic
profit =
TR - TC
183
100
Economic
loss
0
4
9
12
Quantity (sweaters per day)
Total Revenue, Total Cost,
and Economic Profit
Profit/loss
(dollars per day)
Economic profit/loss
42
20
0
4
-20
-40
Economic
profit
Economic
loss
Profit
maximizing
quantity
9
12
Profit/
loss
Quantity
(sweaters
per day)
Marginal Analysis
Using marginal analysis, a
comparison is made between a units
marginal revenue and marginal cost.
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.
Marginal revenue & marginal cost
(dollars per day)
Profit-Maximizing Output
30
25
20
Profitmaximization
point
MC
Loss from
10th sweater
MR
Profit from
9th sweater
10
0
8
9
10
Quantity (sweaters per day)
The Firm’s Short-Run
Supply Curve
Fixed costs must be paid in the shortrun.
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.
Marginal revenue & marginal cost
(dollars per day)
A Firm’s Supply Curve
MC = S
31
MR2
25
MR1
Shutdown
point
AVC
s
MR0
17
0
7
9 10
Quantity (sweaters per day)
Marginal revenue & marginal cost
(dollars per day)
A Firm’s Supply Curve
S
31
25
17
0
s
7
9 10
Quantity (sweaters per day)
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.
END