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Market

Market. Model. Review. I. Pure Competition. $. $. S. d, p, mr. D. X. 0. q. 0. On the left side of the diagram we see the standard market. Equilibrium is at the point where the quantity demanded is the same as the quantity supplied. Nothing new here!. $. $. MC AC. d, p, mr.

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Market

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  1. Market Model Review

  2. I. Pure Competition

  3. $ $ S d, p, mr D X 0 q 0 • On the left side of the diagram we see the standard market. • Equilibrium is at the point where the quantity demanded is the same as the quantity supplied. Nothing new here!

  4. $ $ MC AC d, p, mr X 0 q 0 • On the right side we have the picture of just one firm of a great number of firms. It can be representative of all the others, since all are price takers: they simply accept the market price.

  5. Pure Competition • Note that in economics, costs include normal opportunity cost returns (e.g., market salaries and stock investments) for all factors of production. • When all costs are covered, the firm is making a normal profit. • A “pure” or “economic” profit is large enough to allow greater than market returns to factors or provide for net investment in the firm.

  6. $ $ d, p, mr X 0 q 0 • Characteristics of Pure Comp: • Many firms, • A homogenous product, and • No barriers to exit and entrance. • Entry is the automatic response to the profit incentive.

  7. $ $ d, p, mr X 0 q 0 • Results? Efficiency. • Easy market access (entry) denies long-term pure profit. • Dtemporary NR  entry  Sand price adjustment  efficiency, since P=AC

  8. II. Monopoly

  9. MONOPOLY • The monopolist (compare to pure competition) is the only seller facing the industry-wide demand curve. • The monopolist can often make profit by restricting output and raising the price. (Sliding to the left, back up the demand curve.)

  10. $ ac mc mr D=ar 0 Q MONOPOLY • Here we see the monopolist maximizing profit by equating MC and MR. • MC is the cost of selling 1 more unit. MR is the revenue from selling 1 more unit. • We can gain no more revenue than by equating MC and MR. This can be seen by….

  11. MONOPOLY • How to maximize profits. Select the output and price that make TR as much greater than TC as possible. Note where TC and TR diverge, and, after Q*, converge. They are furthest apart at Q*. $ TC TR Note the slopes of TC and TR. They are MC and MR, and are equal at Q*. Q Q* NR

  12. III. Oligopoly

  13. Oligopoly • Oligopolies have a small number of firms (2 to 5 perhaps) • “Few Sellers”

  14. Oligopoly • Interdependence -- The battle for market share leads to uncertainty. • -- If an oligopolist tries to increase market share, what will be the competitors’ response? Price wars and non-price competition (through product differentiation). • Many models are used to reflect the oligopoly situation, since there are many reactions to uncertainty.

  15. Oligopoly $ $ Cartel TR Max with Π constraint mc Min  mr 0 0 Q Q • The many models of oligopoly, reflect differing reactions to uncertainty in different kinds of oligopoly industries. • Where oligopolists collude to flee uncertainty and to secure greater profits, cartels may be formed.

  16. $ $ Cartel TR Max with Π constrant mc Min  mr 0 0 Q Q Oligopoly • Otherwise, firms tend to avoid price wars and compete through product differentiation.

  17. IV. Monopolistic Competition

  18. Monopolistic Competition $ ac mc 0 Q • Several firms (10 to 20 perhaps): enough so no interdependence. • Great importance of many retail items (even where production is on oligopoly basis) and for service firms.

  19. $ ac mc 0 Q Monopolistic Competition • Differentiation and product groups. • Entry pushes D downward until AC just rests on the demand curve. • Long-run profit can exist only if entry is blocked. This can be done through licensing.

  20. Monopolistic Competition • Notice that additional firms joining the product group (entry) will lead to a shifting of the demand curve downward or to the right. This works just as it does in pure competition. With entry, S shifts out and the Firm’s D curve (price line) falls

  21. Monopolistic Competition With entry, D also falls here until costs are just covered. With entry, S shifts out and the Firm’s D curve (price line) falls

  22. Porter's Forces • The competitive environment differs distinctly depending on which of these models holds for a given firm. • As Michael Porter has shown, there are extensive forces of competition confronting nearly all firms as part of their environment. These forces emanate from: • firms in other industries offering substitute products, • potential new entrants, • buyers with monopsony power, • suppliers of key inputs.

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