4.-Market-Structure

MicroeconomicsForUndergraduateStudentsShandongUniversityLearningObjectives•Defineaperfectlycompetitivemarketandexplainwhyaperfectcompetitorfacesahorizontaldemandcurve.•Explainhowafirmmaximizesprofitsinaperfectlycompetitivemarket.•Usegraphstoshowafirm’sprofitorloss.•Explainwhyfirmsmayshutdowntemporarily.•Explainhowentryandexitensurethatperfectlycompetitivefirmsearnzeroeconomicprofitinthelongrun.•Explainhowperfectcompetitionleadstoeconomicefficiency.2020/2/16ManagementSchoolofShandongUniversityWangJun2TheFourMarketStructures2020/2/16ManagementSchoolofShandongUniversityWangJun3MARKETSTRUCTURECHARACTERISTICPERFECTCOMPETITIONMONOPOLISTICCOMPETITIONOLIGOPOLYMONOPOLYNumberoffirmsTypeofproductEaseofentryExamplesofindustriesManyIdenticalHigh•Wheat•ApplesManyDifferentiatedHigh•SellingDVDs•RestaurantsFewIdenticalordifferentiatedLow•Manufacturingcomputers•ManufacturingautomobilesOneUniqueEntryblocked•First-classmaildelivery•TapwaterPerfectlycompetitivemarket•Amarketthatmeetstheconditionsof(1)manybuyersandsellers,(2)allfirmssellingidenticalproducts,and(3)nobarrierstonewfirmsenteringthemarket.APerfectlyCompetitiveFirmCannotAffecttheMarketPrice•PricetakerAbuyerorsellerthatisunabletoaffectthemarketprice.2020/2/16ManagementSchoolofShandongUniversityWangJun4TheDemandCurvefortheOutputofaPerfectlyCompetitiveFirm2020/2/16ManagementSchoolofShandongUniversityWangJun5APerfectlyCompetitiveFirmFacesaHorizontalDemandCurveTheDemandCurvefortheOutputofaPerfectlyCompetitiveFirm2020/2/16ManagementSchoolofShandongUniversityWangJun6TheMarketDemandforWheatversustheDemandforOneFarmer’sWheatDon’tConfusetheDemandCurveforFarmerParker’sWheatwiththeMarketDemandCurveforWheat=TR–TCRevenueforaFirminaPerfectlyCompetitiveMarketAveragerevenue(AR)Totalrevenuedividedbythequantityoftheproductsold.Marginalrevenue(MR)Changeintotalrevenuefromsellingonemoreunitofaproduct.or,quantityinChangerevenueintotalChangeRevenueMarginalQTRMRRevenueforaFirminaPerfectlyCompetitiveMarket2020/2/16ManagementSchoolofShandongUniversityWangJun8FarmerParker’sRevenuefromWheatFarmingNUMBEROFBUSHELS(Q)MARKETPRICE(PERBUSHEL)(P)TOTALREVENUE(TR)AVERAGEREVENUE(AR)MARGINALREVENUE(MR)012345678910$44444444444$0481216202428323640-$4444444444-$4444444444DeterminingtheProfit-MaximizingLevelofOutput2020/2/16ManagementSchoolofShandongUniversityWangJun9FarmerParker’sRevenuefromWheatFarmingQUANTITY(BUSHELS)(Q)TOTALREVENUE(TR)TOTALCOSTS(TC)PROFIT(TR-TC)MARGINALREVENUE(MR)MARGINALCOST(MC)012345678910$0.004.008.0012.0016.0020.0024.0028.0032.0036.0040.00$1.004.006.007.509.5012.0015.0019.5025.5032.5040.50–$1.000.002.004.506.508.009.008.506.503.50–0.50—$4.004.004.004.004.004.004.004.004.004.00—$3.002.001.502.002.503.004.506.007.008.00DeterminingtheProfit-MaximizingLevelofOutput2020/2/16ManagementSchoolofShandongUniversityWangJun10TheProfit-MaximizingLevelofOutputDeterminingtheProfit-MaximizingLevelofOutput•wecandrawthefollowingconclusions:2020/2/16ManagementSchoolofShandongUniversityWangJun111Theprofit-maximizinglevelofoutputiswherethedifferencebetweentotalrevenueandtotalcostisthegreatest.2Theprofit-maximizinglevelofoutputisalsowheremarginalrevenueequalsmarginalcost,orMR=MC.=(PxQ)TCQQP)(QProfitQTCPATCQProfitProfit=(PATC)QShowingaProfitontheGraph2020/2/16ManagementSchoolofShandongUniversityWangJun13’tLetThisHappentoYOU!RememberThatFirmsMaximizeTotalProfit,NotProfitperUnitIllustratingWhenaFirmIsBreakingEvenorOperatingataLoss2020/2/16ManagementSchoolofShandongUniversityWangJun151PATC,whichmeansthefirmmakesaprofit.2P=ATC,whichmeansthefirmbreakseven(itstotalcostequalsitstotalrevenue).3PATC,whichmeansthefirmexperienceslosses.IllustratingWhenaFirmIsBreakingEvenorOperatingataLoss2020/2/16ManagementSchoolofShandongUniversityWangJun16