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Market structure
The characteristics of a market that influence how trading takes place
1. How many buyers and sellers? 2. Products: standardized or significantly different? 3. Barriers to entry/exit ?
Market structure
Types of markets
Perfect competition Monopoly Monopolistic competition Oligopoly
Standardized product
buyers do not perceive differences between the products
px*
x1
x1*
x2 x
x2*
X x
X*
x1* + x2* = X*
P1
q1A
quantity
q1B
quantity
Q1
Quantity
q1A + q1B = Q1
1 2 3
5 10 15
4
5 6 7
20
25 30 35
2000
1800 1500 1200
1000
1300 1500 1800
Disequilibrium
Disequilibrium Equilibrium Disequilibrium
8
9 10 11 12
40
45 50 55 60
1000
800 500 400 100
2000
2500 2800 3000 3500
Disequilibrium
Disequilibrium Disequilibrium Disequilibrium Disequilibrium
Perfect Competition
Individual Demand Curve Quantity Demanded at Different Prices Quantity Supplied at Different Prices Individual Supply Curve
Added together Market Demand Curve Quantity Demanded by All Consumers at Different Prices
Added together Quantity Supplied by All Firms at Different Prices Market Supply Curve
Market Equilibrium
P S D
Equilibrium of the firm: Break even point Total Cost and Total Revenue
Total Revenue
Total Cost
The amount that the firm receives for the sale of its output. The amount that the firm pays to buy inputs.
Equilibrium of the firm: Break even point Total Cost and Total Revenue
Quantity Price Total Revenue 400 800 1200 1600 2000 Total Cost Break even point
1 2 3 4 5
6
7 8
400
400 400
2400
2800 3200
1850
1950 2500 Maximum Profit
Equilibrium of the firm: Break even point Total Cost and Total Revenue
Price, TR And TC 2,800 1,950 Break Even point A
TR
550
Slope = 400
10 Quantity
400 D
Rs400
Profit Maximization
Price
(MR=MC)
MC
d = MR
10 Output
Profit Maximization
Total Profit = TR TC MR>MC increase output Maximize profit: MR=MC Measuring Total Profit
Profit per unit = P ATC
If P > ATC the firm earns profit If P < ATC the firm suffers a loss
Equilibrium of firm under perfect competition Under perfect competition the competitive seller is a price taker and not a maker as in the case of monopoly. Hence as the in the definition R = pq, the price p is a constant for the competitive seller. Therefore
dR/dQ = P = PQ i.e. MR = AR.. (3)
Now from (2) and (3) the necessary condition for equilibrium of firm under perfect competition can be restated as MC = MR = AR .(4)
Price
400 300
Output
MC
ATC d = MR Output
Short-Run Equilibrium
Competitive firms can earn economic
The market sums buying and selling preferences of individual consumers and producers, and determines market price Each buyer and seller Takes market price as given Is able to buy or sell the desired quantity
2.00
D1
D2
400,000 700,000
Output
Output
3. If the demand curve shifts to D2 and the market equilibrium moves here . . .
Long-Run Equilibrium
Market Price A 4.50 S1 With initial supply curve S1, market price is 4.50 Firm Price so each firm earns an economic profit. 4.50
MC A d ATC 1
900,000
Output
9,000
Output
Firm
MC A d ATC 1 E
2.50
E D
2.50
d2
900,000 1,200,000
Profit attracts entry, shifting the supply curve rightward
Output
5,000
9,000
Output
until market price falls to Rs. 2.50 and each firm earns zero economic profit.
Economic loses firms exit until economic loss = 0 In the LR, firms earn normal profit zero economic profit
And
Operate at minimum point of LRATC curve
ATC1
d1 = MR1
MC2 ATC
E
d2 = MR2
q1
Output
q*
Output
2. The firm could earn positive profit with a larger plant, producing here
4. and all firms earn zero economic profit and produce at minimum LRATC.
Example
The long run cost function of a representative firm in an industry C = q3 10q2 + 50q. Determine the equilibrium price, aggregate quantity supplied and the number of firms in the industry when demand law for the product is D = 100 2p.
Example
The long run cost function of a firm is C = q3 8q2 + 20q. Prove that MC = AC at the minimum point of AC.