Copyright © 2004 South-Western WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and

Copyright © 2004 South-Western

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


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.


Figure 2 Market Demand Curve vs. Firm Demand Curve


quantity of output (q)

Demand

(a) A Competitive Firm’s Demand Curve (b) Competitive Market Demand Curve

0

Price

Quantity of Output (Q)0

Price

Demand


The Revenue of a Competitive Firm

• Total revenue for a firm is the selling price times the quantity sold.

TR = (P TR = (P q) q)

• Price is fixed (price taker).Price is fixed (price taker).

• Total revenue is proportional to the amount of output.


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.


WHY MONOPOLIES ARISE

• The fundamental cause of monopoly is barriers to entry.


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.


Figure 2 Demand Curves for Competitive and Monopoly Firms


quantity of output (q)

Demand

(a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve

0

Price

Quantity of Output (Q)0

Price

Demand


A Monopoly’s Revenue

• Total Revenue

P Q = TR

• Price is not fixed (price maker).Price is not fixed (price maker).

P = a – b QP = a – b Q


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


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.


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.


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.


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



• 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.



• 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.


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.


The Four Types of Market Structure


• Tap water• Cable TV

Monopoly(Chapter 15)

• Novels• Movies

MonopolisticCompetition(Chapter 17)

• Tennis balls• Crude oil

Oligopoly(Chapter 16)

Number of Firms?

Perfect

• Wheat• Milk

Competition(Chapter 14)

Type of Products?

Identicalproducts

Differentiatedproducts

Onefirm

Fewfirms

Manyfirms

Documents

Copyright © 2004 South-Western WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and