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Industrial Organization. AG BM 102. Introduction. Willard’s Mistake Competitive Environment Relevant Market Market power Market structure – Market Conduct-Market performance.
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Industrial Organization AG BM 102
Introduction • Willard’s Mistake • Competitive Environment • Relevant Market • Market power • Market structure – Market Conduct-Market performance
Market Structure – those characteristics of the market that significantly affect the behavior and interaction of buyers and sellers
Market Conduct – a firm’s policies toward its market and toward the moves made by its rivals in that market
Market Performance – how well does an industry do what society might reasonably expect it to do
Market – a collection of firms, each of which is supplying products that have some degree of substitutability, to the same potential buyers • Common buyers for sellers • Common sellers for buyers • Relatively homogeneous product
Industry- sellers of a particular product or closely competing products
Relevant market – the portion of the total market that a participant views as including his or her direct competitors and customers (or suppliers)
Some market models • Pure competition • Monopoly – a single seller • Monopsony – a single buyer
Marginal RevenueThe change in total revenue from expanding sales by one more unit
Calculating Marginal Revenue • Solve the demand function for P • P = 12 –Q • Take the coefficient of Q and double it • MR = 12 – 2Q
For Monopoly, find where MC =MR and then go up to the price on the demand curve
Marginal Factor CostThe change in total factor cost from buying one additional unit of an input
Calculating Marginal Factor Cost • Solve the Supply curve for P • P = Q • Double the coefficient of Q • MFC = 2Q • Ordinarily the line doesn’t run through the origin • The process is the same – solve for P – double the coefficient of Q
For Monopsony, find where MFC =MVP and then go down to the price on the supply curve
Concluding Comments • Where does a 500 pound gorilla sit? • Market power is important • Understanding it helps you understand market behavior