ECON 308 Week 6 Chapter 6 Market Structure Market structure Objectives Students should be able to Differentiate among the four archetypal market structures Distinguish between price takers and price searchers Market structure What is a market All firms and individuals willing and able to buy or sell a particular product What is market structure Defined by attributes of the market environment Demand Facing the Firm P P D1 P D2 Q Q P D3 D4 Q Increasing degrees of Competition Increasing degrees of Market Power Q Market structure the archetypes Monopoly Oligopoly Monopolistic competition Perfect competition Perfect competition characteristics Many buyers and sellers Product homogeneity Low cost and accurate information Free entry and exit Best regarded as a benchmark Price Taker Firm Demand Curve P P Market D Firm S Pe Pe D MR S D Qe Q T Qe Q T Firm supply Short run Marginal cost curve above average variable cost P SRMC Long run Long run marginal cost curve above long run average cost Long Run Industry Equilibrium P P Market D Firm MC S ATC Pe Pe D S D Qe Q T Qe Q T Sources of Market Power Barriers to entry Incumbent reactions Incumbent advantages Precommitment contracts Licenses and patents Learning curve effects Pioneering brand advantages Specific assets Economies of scale Excess capacity Reputation effects Monopoly Strong barriers to entry single supplier Profit maximization faces market demand and sets MR MC Unexploited gains from trade Monopolistic competition Multiple firms produce similar products Firms face downsloping demand curves Profit maximization occurs where MC MR In the limit firms compete away economic profits Oligopoly A few firms produce most market output Products may or may not be differentiated Effective entry barriers protect firm profitability Firm interdependence requires strategic thinking Price Demand Facing the Firm Demand 10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 8 Qty T Total Revenue Price Demand 10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 Qty T Marginal Revenue Additional Revenue Price Demand 10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 Qty T Derivation of Marginal Revenue Price Quantity Total Revenue Marginal Revenue 10 00 9 00 8 00 7 00 6 00 5 00 4 00 3 00 2 00 1 2 3 4 5 6 7 8 9 10 00 18 00 24 00 28 00 30 00 30 00 28 00 24 00 18 00 8 00 6 00 4 00 2 00 0 2 00 4 00 6 00 Marginal Revenue Price Demand D MR Qty T Marginal Revenue Elasticity Price Ed 1 Ed 1 Ed 1 MR Demand Qty T Monopoly Output Price Demand MC Pm Mc D MR Qm Qty T Market Power No Close Substitutes Price MC Demand Pm Mc MR Qm D Qty T Market Power Few Close Substitutes Price MC Demand Pm Mc D MR Qm Qty T Market Power Many Close Substitutes Price Demand MC Pm D Mc MR Qm Qty T No Market Power Many Identical Substitutes Price MC Demand P MR P Mc Qm Qty T Monopoly Profit Demand MC Pm AC Profit D MR Qm Qty T Monopoly After Entry of Competition Price Demand MC AC Pm D MR Qm Qty T Efficiency Loss Demand MC Pm Mc MR Qm D Qty T Sources of Monopoly Power Barriers to Entry Absolute Cost Advantage Unique access to production technique or an essential input Natural Monopoly Economies of Scale Product differentiation Regulatory Barriers Patents copyrights franchise license
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