In competition any one firms behavior is irrelevant to its competitorsMarket Structure AnalysisDefines intensity of competition in an industryNumber of firms in the industryComposed of many firms?Can they set the market price?Dominated by larger firms that can set prices?Nature of the industry’s productHomogeneous products?Barriers to entryRequires a lot of money to enter?Extent to which individual firms can control pricesMedicine people can set prices versus farmers cantPrimary Market StructuresCompetitionMany buyers and sellersHomogenous productsNo barriers to entryNo long run economic profitsNo control over priceMonopolistic competitionMany buyers and sellersDifferentiated productsNo barriers to market entryNo long run economic profitsSome control over priceOligopolyFewer firmsMutually interdependent decisionsSubstantial barriers to entryPotential for long run economic profitsShared market power and considerable control over priceMonopolyOne firmNo close substitutes for productNearly insuperable barriers to entryPotential for long run economic profitSubstantial market power and control over priceCompetitionHave many buyers and sellers and none can influence the product priceProduce a homogeneous productHave all the information to make good decisionsFree to enter firm wheneverPrice takers and should take whatever price they can get for their productDemand curve for the individual firm is horizontalLong run everything is variable, in the short run at least one factor is fixedMarginal RevenueChange in total revenue that result from the sale of one added unit of productChange in total revenue divided by the change in quantity soldIn a competitive market the marginal revenue is equal to the priceTotal RevenuePrice times quantityIn a competitive market you want MR=MC=P then you stop producingProfit maximizing RuleA firm maximizes profit by continuing to produce and sell output until marginal revenue equals marginal costWhen the price/marginal revenue point on the demand curve is at the lowest point on the ATC you are producing zero economic profits or a normal profitNormal profitsP=ATCNo pressure for firms to enter or leave the industryIf your demand drops and leads your price to drop to below the ATC but above the AVC you should produce where MR=MC this scenario is called the loss minimizationYou find your loss by finding the change in price times outputIf your price drops to a level at AVC losses begin to exceed fixed costs so this is your shutdown pointAVC=MC shutdownAVC>PShutdown point your firm will be indifferent because you will lose 1000 either way because that is your fixed costIf a firm is producing any where between AVC and ATC it will experience losses but not enough to shut downShort run supply curveThe point on the MC curve above the AVCIf firms in the industry are earning short run economic profits, new firms will want to enter in the long runWhen more firms enter an industry, the supply shifts out but the output for each individual firm decreasesWhen firms suffer economic losses a lot of firms leave the industry and that shifts supply inward which generates a new equilibrium price that expands output and makes MR=MCWhen MR=MC there are no incentives to enter or leave the industryCompetition and Public InterestMarket price in the long run is equal to the minimum point on both the short run average total cost cure and the long run average total cost curveP=MR=MC=SRATC min=LRATC minLowest possible price is the LRATC minProductive efficiency is when products are sold to consumers at their lowest possible price, minimum SRATC and LRATCAllocative efficiencyThe price consumers pay for a given product is equal to the minimum average total cost and the marginal costWhen MC and P are equal it is allocative efficiencyME Chapter 8 12/10/2011 22:44:00← In competition any one firms behavior is irrelevant to its competitors← Market Structure Analysis- Defines intensity of competition in an industry- Number of firms in the industryoComposed of many firms?oCan they set the market price?oDominated by larger firms that can set prices?- Nature of the industry’s productoHomogeneous products?- Barriers to entryoRequires a lot of money to enter?- Extent to which individual firms can control pricesoMedicine people can set prices versus farmers cant← Primary Market Structures- CompetitionoMany buyers and sellersoHomogenous productsoNo barriers to entryoNo long run economic profitsoNo control over price- Monopolistic competitionoMany buyers and sellersoDifferentiated productsoNo barriers to market entryoNo long run economic profitsoSome control over price- OligopolyoFewer firmsoMutually interdependent decisionsoSubstantial barriers to entryoPotential for long run economic profitsoShared market power and considerable control over price- MonopolyoOne firmoNo close substitutes for productoNearly insuperable barriers to entryoPotential for long run economic profitoSubstantial market power and control over price← Competition- Have many buyers and sellers and none can influence the product price- Produce a homogeneous product- Have all the information to make good decisions- Free to enter firm whenever- Price takers and should take whatever price they can get for their product← Demand curve for the individual firm is horizontal← Long run everything is variable, in the short run at least one factor is fixed← Marginal Revenue- Change in total revenue that result from the sale of one added unit of product- Change in total revenue divided by the change in quantity sold- In a competitive market the marginal revenue is equal to the price← Total Revenue- Price times quantity← In a competitive market you want MR=MC=P then you stop producing← Profit maximizing Rule- A firm maximizes profit by continuing to produce and sell output until marginal revenue equals marginal cost← When the price/marginal revenue point on the demand curve is at the lowest point on the ATC you are producing zero economic profits or a normal profit← Normal profits- P=ATC- No pressure for firms to enter or leave the industryIf your demand drops and leads your price to drop to below the ATC but above the AVC you should produce where MR=MC this scenario is called the loss minimizationYou find your loss by finding the change in price times outputIf your price drops to a level at AVC losses begin to exceed fixed costs so thisis your shutdown point- AVC=MC shutdown- AVC>P- Shutdown point your firm will be