MARKET STRUCTURE,Price and Output Determination,PRICE AND OUTPUT DETERMINATION,To determine the optimum output and pricing strategy in different market structure What is optimum? Maximize p Minimize C,MARKET STRUCTURE,Refers to the relationship between individual firms and the relevant market as a whole Depends on: Number and relative size of firms in the industry Degree of product differentiation Degree of decision making by individual firms Condition of entry and exit,Basic Typesof Market Structure,Pure Competition Monopoly Monopolistic Competition Oligopoly,Monopolistic Competition,Oligopoly,Monopoly,Pure Competition,Characteristics of Perfect Competition, Monopolistic Competition, Oligopolyand Monopoly,There is a continuum of market structures:,Pure Competition assumes: 1.a very large number of buyers and sellers 2.homogeneous product (standardized) plete knowledge of all relevant market information 4.free entry and exit (no barriers) These assumptions imply several things about competitive markets, including price equals marginal cost.,Pure Monopolistic Competition Competition Oligopoly Monopoly Best Worst,Monopoly assumes: 1.Only one firm in the market area 2.Low cross price elasticity with other products. 3.No interdependence with other competitors. 4.Substantial entry barriers These assumptions imply that the monopoly price is well above marginal cost. Monopoly is discussed in full in Chapter 11. Monopolistic competition assumes: 1.A large number of firms, some of which may be dominant in size 2.Differentiated products 3.Independent decision making by individual firms 4.Easy entry and exit These assumptions imply several things about monopolistic competition, including that the price in the long run is equal to average cost.,Oligopoly assumes: 1.Only a few firms in the market area 2.Products may be differentiated or undifferentiated 3.There is a large degree of interdependence with other competitors These assumptions imply several things about monopolies, including that the monopoly price is well above marginal cost. After going briefly over these four market structures, this chapter examines: Pure Competition Monopolistic Competition,PERFECT COMPETITION MARKET,Perfectly Competitive Markets,The model of perfect competition can be used to study a variety of markets Basic assumptions of Perfectly Competitive Markets Price taking Product homogeneity Free entry and exit,Perfectly Competitive Markets,Price Taking The individual firm sells a very small share of the total market output and, therefore, cannot influence market price. Each firm takes market price as given price taker The individual consumer buys too small a share of industry output to have any impact on market price.,Perfectly Competitive Markets,Product Homogeneity The products of all firms are perfect substitutes. Product quality is relatively similar as well as other product characteristics Agricultural products, oil, copper, iron, lumber Eg. Buyers of corn do not ask which individual farm grew the product In contrast: Heterogeneous products, such as brand names, can charge higher prices because they are perceived as better,Perfectly Competitive Markets,Free Entry and Exit When there are no special costs that make it difficult for a firm to enter (or exit) an industry Buyers can easily switch from one supplier to another. Consumer also can easily switch to a rival firm if a current supplier raises its price Suppliers can easily enter or exit a market. Pharmaceutical companies not perfectly competitive because of the large costs of R indicating the industry is competitive If R wl + rk, consider going out of business,Long-run Competitive Equilibrium,Entry and Exit The long-run response to short-run profits is to increase output and profits. Profits will attract other producers High return causes investors to direct resources away from other industries and into this one there will be new entry into the market. More producers increase industry supply which lowers the market price. (SS shift to the right) Cause output increase , price falls This continues until there are no more profits to be gained in the market zero economic profits,Long-Run Competitive Equilibrium Profits,Output,Output,$ per unit of output,$ per unit of output,Firm,Industry,Profit attracts firms Supply increases until profit = 0,Firm earn positive profits because MR LMC,In the LR, firm earn zero profit and the re is no incentive to enter or exit the industry,CHAPTER 14 FIRMS IN COMPETITIVE MARKETS,In the LR, the number of firms can change due to entry & exit.,If existing firms incur losses, Some will exit the market. SR market supply curve shifts left. P rises, reducing remaining firms losses. Exit stops when firms economic losses have been driven to zero.,0,Long-Run Competitive Equilibrium Losses,Output,Output,$ per unit of output,$ per unit of output,Firm,Industry,Losses cause firms to leave Supply decreases until profit = 0,Long