Transcript competitive market

WHAT IS A COMPETITIVE MARKET?
• A perfectly competitive market has the following
characteristics:
• There are many buyers and sellers in the market.
• The goods offered by the various sellers are largely the
same.
• Firms can freely enter or exit the market.
• Perfect information
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WHAT IS A COMPETITIVE MARKET?
• As a result of its characteristics, the perfectly
competitive market has the following outcomes:
• The actions of any single buyer or seller in the market
have a negligible impact on the market price.
• Market participants are price takers.
• Entry/Exit drive economic profit to zero.
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Figure 2 Market Demand Curve vs. Firm Demand Curve
(a) A Competitive Firm’s Demand Curve
Price
(b) Competitive Market Demand Curve
Price
Demand
Demand
0
quantity of output (q)
0
Quantity of Output (Q)
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The Revenue of a Competitive Firm
• Total revenue for a firm is the selling price times
the quantity sold.
TR = (P  q)
• Price is fixed (price taker).
• Total revenue is proportional to the amount of
output.
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Monopoly vs. Competition
• A firm is considered a monopoly if . . .
• it is the sole seller of its product.
• its product does not have close substitutes.
• while a competitive firm is a price taker, a monopoly
firm is a price maker.
• A monopolist must lower their to price to increase sales.
• Monopolist will typically earn economic profit.
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WHY MONOPOLIES ARISE
• The fundamental cause of monopoly is barriers to
entry.
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WHY MONOPOLIES ARISE
• Barriers to entry have three sources:
• Ownership of a key resource.
• The government gives a single firm the exclusive right
to produce some good.
• Costs of production make a single producer more
efficient than a large number of producers.
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Figure 2 Demand Curves for Competitive and Monopoly Firms
(a) A Competitive Firm’s Demand Curve
Price
(b) A Monopolist’s Demand Curve
Price
Demand
Demand
0
quantity of output (q)
0
Quantity of Output (Q)
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A Monopoly’s Revenue
• Total Revenue
P  Q = TR
• Price is not fixed (price maker).
P=a–bQ
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HOW MONOPOLIES MAKE PRODUCTION
AND PRICING DECISIONS
• Monopoly versus Competition
• Monopoly
• Is the sole producer (barriers to entry)
• Faces a downward-sloping demand curve
• Is a price maker
• Reduces price to increase sales
• Competitive Firm
• Is one of many producers (no barriers to entry/exit)
• Faces a horizontal demand curve
• Is a price taker
• Sells as much or as little at same price
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BETWEEN MONOPOLY AND
PERFECT COMPETITION
• Imperfect competition refers to market structures
between perfect competition and pure monopoly.
• Types of Imperfectly Competitive Markets
• Oligopoly
• Only a few sellers, each offering a similar or identical product
to the others.
• Monopolistic Competition
• Many firms selling products that are similar but not identical.
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MARKETS WITH ONLY A FEW
SELLERS
• Characteristics of an Oligopoly Market
• Few sellers offering similar or identical products.
• Interdependent firms.
• Best off cooperating and acting like a monopolist by
producing a small quantity of output and charging a
price above marginal cost.
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MARKETS WITH ONLY A FEW
SELLERS
• Because of the few sellers, the key feature of
oligopoly is the tension between cooperation and
self-interest.
• A duopoly is an oligopoly with only two
members. It is the simplest type of oligopoly.
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Monopolistic Competition
• Attributes of Monopolistic Competition
• Markets that have some features of competition and
some features of monopoly.
• Many sellers
• Product differentiation
• Free entry and exit
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Monopolistic Competition
• Product Differentiation
• There are many firms competing for the same group of
customers.
• Each firm produces a product that is at least slightly
different from those of other firms.
• Rather than being a price taker, each firm faces a
downward-sloping demand curve.
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Monopolistic Competition
• Free Entry or Exit
• Firms can enter or exit the market without
restriction.
• The number of firms in the market adjusts until
economic profits are zero.
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COMPETITION WITH
DIFFERENTIATED PRODUCTS
• The Monopolistically Competitive Firm in the
Short Run
• Short-run economic profits encourage new firms to enter
the market. This:
•
•
•
•
Increases the number of products offered.
Reduces demand faced by firms already in the market.
Incumbent firms’ demand curves shift to the left.
Demand for the incumbent firms’ products fall, and their
profits decline.
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The Four Types of Market Structure
Number of Firms?
Many
firms
Type of Products?
One
firm
Few
firms
Differentiated
products
Identical
products
Monopoly
(Chapter 15)
Oligopoly
(Chapter 16)
Monopolistic
Competition
(Chapter 17)
Perfect
Competition
(Chapter 14)
• Tap water
• Cable TV
• Tennis balls
• Crude oil
• Novels
• Movies
• Wheat
• Milk
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© 2004
South-Western
Copyright
© 2004
South-Western