MARKET STRUCTURE

It identifies how a market is made up in terms of: Number of firms in the industry The nature of the product produced The degree to which the firm can influence price Profit levels Firms behaviour pricing strategies, non-price competition, output levels The extent of barriers to entry The impact on efficiency

MARKET STRUCTURE
It is represented by four (4) basic market models Each market model has a set of characteristics which distinguished it from other market models.

MARKET STRUCTURE
Characteristics: Look at these everyday products what type of market structure are the producers of these products operating in?
Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry.
You might even have to ask what the industry is??

Electric Guitar Vodka Jazz Body

Mercedes CLK Coupe Canon SLR Camera Bananas

MARKET STRUCTURE MODELS

PERFECT/PURE TYPE IMPERFECT / NON-PURE TYPE MONOPOLISTIC COMPETITION

PERFECT COMPETITION
PERFECT/PURE COMPETITION PURE MONOPOLY

OLIGOPOLY

PERFECT COMPETITION Competition as a process is a rivalry among firms. Competition as the perfectly competitive market structure.

PERFECT COMPETITION
Large number of firms Products are homogenous (identical) There are no barriers to entry and exit of firms in the long run Zero Transaction Costs

PERFECT COMPETITION
Both buyers and sellers are price takers have no control over the price they charge for their product Firms are profit maximizers Consumers and producers have perfect knowledge about the market No externalities consumption in production and

PERFECT COMPETITION

Serves as a benchmark against which to measure real life and imperfectly competitive markets.

MARKET POWER It is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In Perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors.

MARKET POWER Market participants that have market power are therefore sometimes referred to as price makers, while those without are sometimes called price takers. Significant market power is when prices exceed marginal cost and long run average cost, so the firm makes economic profits.

PERFECTLY COMPETITIVE MARKET

FOREIGN EXCHANGE DEALING & STOCK MARKET
Homogeneous product - US dollar or the Euro Many buyers and sellers Usually each trader is small relative to total market and has to take price as given Sometimes, traders can move currency markets

PERFECTLY COMPETITIVE MARKET

WHOLESALE MARKETS FOR FRESH VEGETABLES, FISH AND FLOWERS

FARMERS MARKET FOR TOMATOES AND ETC.

RICE, CORN, SUGAR, APPLE

PIG, FARMING, CATTLE

THE DEMAND CURVE

A perfectly competitive firms demand schedule is perfectly elastic even though the demand curve for the market is downward sloping. This means that firms will increase their output in response to an increase in demand even though that will cause the price to fall thus making all firms collectively worse off.

MARKET DEMAND VERSUS INDIVIDUAL FIRM DEMAND CURVE

Market Price $10 8 Market supply Price $10 8 Firm

6
4 2 0 Market demand

6
4 2 0 10

Individual firm demand

1,000

3,000 Quantity

20

30

Quantity

PROFIT-MAXIMIZING LEVEL OF OUTPUT

The goal of the firm is to maximize profit. When it decides what quantity to produce it continually asks how changes in quantity affect profit. A firm maximizes profit when MC = MR.

PROFIT-MAXIMIZING LEVEL OF OUTPUT

Marginal revenue (MR) the change in total revenue associated with a change in quantity. Marginal cost (MC) -- the change in total cost associated with a change in quantity.

MARGINALTO MAXIMIZE PROFITS.? MARGINAL COST HOW REVENUE

Since a perfect competitor accepts the market price as given, for competitive firm, marginal revenue is price (MR=P)

MARGINAL COST

Initially, marginal cost falls and then begins to rise. Margin concepts are best defined between the numbers.

MARGINAL REVENUE

HOW TO MAXIMIZE PROFITS.?

THE SUPPLIER WILL CONTINUE TO PRODUCE AS LONG AS MARGINAL COST IS LESS THAN MARGINAL REVENUE.

The supplier will cut back on production if marginal cost is greater than marginal revenue.

MC

MR

MARGINAL COST, MARGINAL REVENUE, AND PRICE

MC

Price = MR Quantity Produced

Marginal Costs Cost

$35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00

0 1 2 3 4 5 6 7 8 9 10

$28.00 20.00 16.00 14.00 12.00 17.00 22.00 30.00 40.00 54.00 68.00

60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 Quantity A A C B P = D = MR

THE MARGINAL COST CURVE IS THE FIRMS SUPPLY CURVE

Marginal cost
C

$70 60
Cost, Price

50
40 A B

30 20
10 0 1 2 3 4 5 6 7 8 9 10 Quantity

FIRMS MAXIMIZE TOTAL PROFIT

When we speak of maximizing profit, we refer to maximizing total profit, not profit per unit.
Firms do not care about profit per unit; as long as an increase in output will increase total profits, a profit-maximizing firm should increase output.

PROFIT MAXIMIZATION USING TOTAL REVENUE AND TOTAL COST

Profit is maximized where the vertical distance between total revenue and total cost is greatest.

At that output, MR (the slope of the total revenue curve) and MC (the slope of the total cost curve) are equal.

PROFIT DETERMINATION USING TOTAL COST AND REVENUE CURVES

TC $385 350 315 Maximum profit =$81 280 245 210 $130 175 140 105 70 Loss 35 0 TR

Total cost, revenue

Loss

Profit

1 2 3 4 5 6 7 8 9

Quantity

THE SHUTDOWN POINT

THE SHUTDOWN DECISION
MC Price 60 50 40 30 20 $17.80 A 10 0 2 4 6 8 Quantity Loss P = MR AVC ATC

SHORT RUN MARKET SUPPLY AND DEMAND

While the firm's demand curve is perfectly elastic, the industry's is downward sloping. For the industry's supply curve we use a market supply curve.

In the short run when the number of firms in the market is fixed, the market supply curve is just the horizontal sum of all the firms' marginal cost curves, taking account of any changes in input prices that might occur.

LONG RUN COMPETITIVE EQUILIBRIUM

Profits and losses are inconsistent with long-run equilibrium. Profits create incentives for new firms to enter, output will increase, and the price will fall until zero profits are made. Zero profit condition is the requirement that in the long run zero profits exist. The zero profit condition defines the long-run equilibrium of a competitive industry.

INCREASE IN DEMAND

In the short run, the price does more of the adjusting. In the long run, more of the adjustment is done by quantity.

LONG-RUN MARKET SUPPLY Two other possibilities exist: Increasing-cost industry factor prices rise as new firms enter the market and existing firms expand capacity. Decreasing-cost industry factor prices fall as industry output expands.

SHORTCOMINGS OF THE COMPETITIVE PRICE SYSTEM

THE INCOME DISTRIBUTION PROBLEM

MARKET FAILURE: EXTERNAL COSTS AND PUBLIC GOODS

THANK YOU!!!!!