MANAGERIAL MANAGERIAL ECONOMICS 11ECONOMICS 11thth Edition Edition

ByByMark HirscheyMark Hirschey

Competitive MarketsCompetitive MarketsChapter 10Chapter 10

Chapter 10Chapter 10OVERVIEWOVERVIEW

Competitive Environment Factors That Shape the Competitive

Environment Competitive Market Characteristics Profit Maximization in Competitive

Markets Marginal Cost and Firm Supply Competitive Market Supply Curve Competitive Market Equilibrium

Chapter 10Chapter 10KEY CONCEPTSKEY CONCEPTS

market structure market potential entrant product

differentiation competitive markets barrier to entry barrier to mobility barrier to exit

perfect competition price takers

normal profit economic profit economic losses marginal analysis competitive firm

short-run supply curve

competitive firm long-run supply curve.

Competitive Environment What is Market Structure?

Market structure is the competitive environment. Number of buyers and sellers. Potential entrants. Barriers to entry and exit, etc.

Vital Role of Potential Entrants Competition comes from actual and potential

competitors. Potential entrants often affect price/output

decisions.

Factors that Shape the Competitive Environment

Product Differentiation R&D, innovation, and advertising are important

in many markets. Production Methods

Economies of scale can preclude small-firm size.

Entry and Exit Conditions Barriers to entry and exit can shelter

incumbents from potential entrants. Buyer Power

Powerful buyers can limit seller power.

Competitive Market Characteristics

Basic Features Many buyers and sellers. Product homogeneity. Free entry and exit. Perfect information.

Examples of Competitive Markets Agricultural commodities. Prominent markets for intermediate goods and

services. Unskilled labor market.

Profit Maximization in Competitive Markets

Profit Maximization Imperative Normal profit is return necessary to

attract and maintain capital investment. Efficient firms can earn normal profit. Inefficient firms suffer losses.

Role of Marginal Analysis Set Mπ = MR – MC = 0 to maximize

profits. MR=MC when profits are maximized.

Marginal Cost and Firm Supply Short-run Firm Supply

Competitive market price (P) is shown as a horizontal line because P=MR.

Firm’s marginal-cost curve shows the amount of output the firm would be willing to supply at any market price.

Marginal cost curve is the short-run supply curve so long as P > AVC .

Long-run Firm Supply Marginal cost curve is the long-run

supply curve so long as P > ATC. In long run, firm must cover all

necessary costs of production and earn a normal profit.

Competitive Market Supply Curve

Market Supply With a Fixed Number of Competitors Supply is the sum of competitor output.

Market Supply With Entry and Exit Entry results in more firms, increased output, a

rightward shift in the supply curve, and drives down prices and profits.

Exit reduces the number of firms, decreases the quantity of output, shifts the supply curve leftward, and allows prices and profits to rise for remaining competitors.

Competitive Market Equilibrium Balance of Supply and Demand

Equilibrium is a balance of supply and demand.

Normal Profit Equilibrium With a horizontal market demand curve,

MR=P. P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.