Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56Slide 57Market Structure and Market Structure and Perfect Competitive FirmPerfect Competitive FirmHall and Lieberman, 3Hall and Lieberman, 3rdrd edition, edition, Thomson South-Western, Chapter 8Thomson South-Western, Chapter 822OverviewOverviewWhat you will learn from this lectureWhat you will learn from this lecture– Market structureMarket structure– 3 Requirements for perfect competition3 Requirements for perfect competition–Demand curve for a competitive firmDemand curve for a competitive firm–Supply curve for a competitive firmSupply curve for a competitive firm–How is the profit is maximized? At which output How is the profit is maximized? At which output level?level?–How is profit or loss is measured using graphs?How is profit or loss is measured using graphs?–Short Run EquilibriumShort Run Equilibrium–Long Run EquilibriumLong Run Equilibrium–Perfect Competition and Plant Size in the long runPerfect Competition and Plant Size in the long run–What happens when things change?What happens when things change?33Part I Market StructurePart I Market StructureSellers want to sell at the Sellers want to sell at the highest possible price highest possible price –Buyers seek lowest possible priceBuyers seek lowest possible price–All trade is voluntaryAll trade is voluntary–different goods and services are different goods and services are sold in vastly different wayssold in vastly different waysEconomists think about market Economists think about market structurestructure–Characteristics of a market that Characteristics of a market that influence behavior of buyers and influence behavior of buyers and sellers when they come together sellers when they come together to tradeto trade44Types of MarketTypes of MarketFor any particular market, we ask For any particular market, we ask –How manyHow many buyers and sellers are there in the buyers and sellers are there in the market?market?–Is each seller offering a Is each seller offering a standardized productstandardized product, , more or less indistinguishable from that more or less indistinguishable from that offered by other sellers?offered by other sellers?–Are there any Are there any barriers to entry or exitbarriers to entry or exit, or can , or can outsiders easily enter and leave this market?outsiders easily enter and leave this market?Four basic types of marketFour basic types of market–Perfect competitionPerfect competition–MonopolyMonopoly–Monopolistic competitionMonopolistic competition–OligopolyOligopoly55Part II. The Three Requirements of Perfect Part II. The Three Requirements of Perfect CompetitionCompetitionLarge numbers of buyers and sellersLarge numbers of buyers and sellers–Each buys or sells only a tiny fraction of the Each buys or sells only a tiny fraction of the total quantity in the markettotal quantity in the marketSellers offer a standardized productSellers offer a standardized productSellers can easily enter into or exit Sellers can easily enter into or exit from marketfrom market–Significant barriers to entry and exit can Significant barriers to entry and exit can completely change the environment in completely change the environment in which trading takes place which trading takes place Examples?Examples?66i. A Large Number of Buyers and Sellersi. A Large Number of Buyers and SellersIn perfect competition, there In perfect competition, there must be many buyers and must be many buyers and sellerssellers–How many?How many?Number must be so large that no Number must be so large that no individual decision maker can individual decision maker can significantly affect price of the significantly affect price of the product by changing quantity it product by changing quantity it buys or sellsbuys or sells77ii. Selling Standardized Productsii. Selling Standardized ProductsBuyers do not perceive Buyers do not perceive significant differences between significant differences between products of one seller and products of one seller and anotheranother–For instance, buyers of wheat do For instance, buyers of wheat do not prefer one farmer’s wheat over not prefer one farmer’s wheat over anotheranother88iii. Easy Entry into and Exit from the iii. Easy Entry into and Exit from the MarketMarketEasy EntryEasy Entry –no significant barriers to discourage no significant barriers to discourage new entrants new entrants –any firm wishing to enter can do any firm wishing to enter can do business on the same terms as firms business on the same terms as firms that are already therethat are already thereEasy exitEasy exit–A firm suffering a long-run loss must A firm suffering a long-run loss must be able to sell off its plant and be able to sell off its plant and equipment and leave the industry for equipment and leave the industry for good, without obstaclesgood, without obstacles99iii. Easy Entry into and Exit from the Marketiii. Easy Entry into and Exit from the MarketIn many markets there are In many markets there are significant barriers to entrysignificant barriers to entry–Legal barriersLegal barriers–Existing sellers have an important Existing sellers have an important advantage that new entrants can not advantage that new entrants can not duplicateduplicateBrand loyaltyBrand loyalty–Cost advantage of existing firms from Cost advantage of existing firms from significant economies of scalesignificant economies of scale1010Is Perfect Competition Realistic?Is Perfect Competition Realistic?Assumptions are rather restrictive Assumptions are rather restrictive In reality, one or more of assumptions will In reality, one or more of assumptions will be violated in vast majority of marketsbe violated in vast majority of markets–Yet economists use perfect competition Yet economists use perfect competition more often than any other market more often than any other market structurestructureWhy?Why?–Model of perfect competition is powerfulModel of perfect competition is powerful–Many markets come reasonably close to Many markets come
View Full Document
Unlocking...