Escolar Documentos
Profissional Documentos
Cultura Documentos
Market structure
The characteristics of a market that influence how trading takes place
1. How many buyers and sellers? 2. Products: standardized or significantly different? 3. Barriers to entry/exit ?
Market structure
Types of markets
Perfect competition Monopoly Monopolistic competition
Perfect CompetitionCharacteristics
Many buyers and sellers
no individual decision maker can significantly affect the price of the product
Standardized product
buyers do not perceive differences between the products
Perfect CompetitionCharacteristics
Each firm attempts to maximize profits Each firm is a price taker
px*
x1
x1*
x2 x
x2*
X x
X*
x1* + x2* = X*
P1
q1A
quantity
q1B
quantity
Q1
Quantity
q1A + q1B = Q1
1 2 3 4 5 6 7 8 9 10 11 12
5 10 15 20 25 30 35 40 45 50 55 60
Disequilibrium Disequilibrium Disequilibrium Disequilibrium Disequilibrium Equilibrium Disequilibrium Disequilibrium Disequilibrium Disequilibrium Disequilibrium Disequilibrium
Perfect Competition
Individual Demand Curve Quantity Demanded at Different Prices Quantity Supplied at Different Prices Individual Supply Curve
Added together Market Demand Curve Quantity Demanded by All Consumers at Different Prices
Added together Quantity Supplied by All Firms at Different Prices Market Supply Curve
Market Equilibrium
P S D Q
Equilibrium of the firm: Break even point Total Cost and Total Revenue
Total Revenue
Total Cost
The amount that the firm receives for the sale of its output. The amount that the firm pays to buy inputs.
Equilibrium of the firm: Break even point Total Cost and Total Revenue
Quantity 1 2 3 Price 400 400 400 Total Revenue 400 800 1200 Total Cost 550 1000 1200 Break even point Break even point
4
5
400
400
1600
2000
1500
1700
6
7 8
400
400 400
2400
2800 3200
1850
1950 2500 Maximum Profit
Equilibrium of the firm: Break even point Total Cost and Total Revenue
Price, TR And TC 2,800 1,950 Break Even point A
TR
550
Slope = 400
10 Quantity
400 D
Rs400
Profit Maximization
Price
(MR=MC)
MC
d = MR
10 Output
Profit Maximization
Total Profit = TR TC MR>MC increase output Maximize profit: MR=MC Measuring Total Profit
Profit per unit = P ATC
If P > ATC the firm earns profit If P < ATC the firm suffers a loss
Price
400 300
Output
MC
ATC d = MR Output
(b)
Price
Firm's Supply
Curve
AVC
Output
Short-Run Equilibrium
Competitive firms can earn economic
The market sums buying and selling preferences of individual consumers and producers, and determines market price Each buyer and seller Takes market price as given Is able to buy or sell the desired quantity
2.00
D1
D2
400,000 700,000
Output
Output
3. If the demand curve shifts to D2 and the market equilibrium moves here . . .
Long-Run Equilibrium
Market Price A 4.50 S1 With initial supply curve S1, market price is 4.50 Firm Price so each firm earns an economic profit. 4.50
MC A d ATC 1
900,000
Output
9,000
Output
Firm
MC A d ATC 1 E
2.50
E D
2.50
d2
900,000 1,200,000
Profit attracts entry, shifting the supply curve rightward
Output
5,000
9,000
Output
until market price falls to Rs. 2.50 and each firm earns zero economic profit.
Economic loses firms exit until economic loss = 0 In the LR, firms earn normal profit zero economic profit
And
Operate at minimum point of LRATC curve
ATC1
d1 = MR1
MC2 ATC
E
d2 = MR2
q1
Output
q*
Output
2. The firm could earn positive profit with a larger plant, producing here
4. and all firms earn zero economic profit and produce at minimum LRATC.
An Increase in Demand
Short-run Rise in market price Rise in market quantity Economic profits Long-run Market equilibrium changes The long-run supply curve Relationship between market price and market quantity - after all long-run adjustments have taken place
Constant-Cost Industry
Price
Market
S1
Price
Firm
MC ATC LRATC d1 = MR1
P1
P1
D1 Q1 Output q1 Output
Market
S1 B
S2
Price
PSR
Firm
B MC
dSR = MRSR
C
P1 A SLR D2 D1 Q1 QSR Q2 Output q1 qSR P1 A
Output
Market
S1 B C
S2 SLR
Price
Firm
LRATC2 LRATC1 d2 = MR2 d1 = MR1
C P2 P1 A
Market
S1
Price
Firm
PSR P1 P2 A
B C
LRATC1
S2
P1 SLR D1 P2 A C d1 = MR1 LRATC2 d2 = MR2
D2
Output q1 Output
Q1
Q2
A Change in Technology
A technological advance
rightward shift of the market supply curve market price decreases Short run - economic profit Long run - zero economic profit
Firms that refuse to use the new technology will not survive.
A Change in Technology
Market
Price S1 Price
Firm
S2
LRATC1 3
A
3 B 2 D 2
LRATC2 d1 = MR1
d2= MR
Q1
Q2
Output
1000
Output
AFC
Q OUTPUT
Market
S2 B A
S1
D1
Q1
Output