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Firm and Market Strutures - Coggle Diagram
Firm and Market Strutures
Perfect Competition
Perfect competition
firm will continue to expand production until
marginal revenue = marginal cost
profit maximizing
firm will produce the quantity Q
when MC = MR = market price
key factor
Number of sellers : many firms
Barriers to entry: very low
Nature of substitute products: very good substitute
Nature of competition: price only
Pricing power: none
individual firm's
demand is perfectly elastic (horizontal)
in perfectly competiton market, firm will not earn economic profits
for any significiant period of time
Optimal price and output for firms
Economic profit = total revenue - the oppprtunity cost of production
, which includes the cost of a normal return to all factors of production, including invested capital
in the
short run
,
economic profit is maximized
at the quantity for which
marginal revenue = marginal cost
profit maximization also occurs when
total revenue exceeds total cost by the maximum amount
economic loss: marginal revunue < marginal cost.
at any output above the quantity where MR = MC, firm will be generating losses on its marginal production
Short run supply curve
for firm:
its MC line above the average variable cost curve (AVC)
Short run market supply curve:
horizontal sum (add up the quantities from all firms at each price) of MC curves for all firm in a given industry
Slope uward to the right.
Changes in Demand, Entry and Exit, Changes in Plant size
in the short run
,
an increase in market demand
( shift of market demand curve to the right)
will increase both equilibrium price and quantity
and vice versa.
in the long run, some firms will increase their scale of operations
in response to the increase in demand and new firms will likely enter the industry
Firm's long run adjustment to a shift in industry demand and the resulting change in price may be either to change the size of its plant or leave the market entirely
other
firms will decrase plant size to reduce econmic loss
- referred
downsizing strategy
If an industry is characterized by firms
earnings economic profit
New firm will enter the market => industry supply to increase
(industry supply curve shifts to the right) => increase equilibirum output and decrase equilibirum price
each firm will produce less because price falls => end result is
total revenue and economic profit will decrease
if firms in an industry are experiencing loss
some firm will exit the market
=>
industry supply to decrease and increase equilibirum price
remaining firm will increase production at higher market price
. This will cause total revenue increase, reducing the economic losses
Permanent change in demand
leasts to the entry of firms to or exit of firms from an industry
Monopolistic Competition
Market characteristics
Number of sellers : many firms
Barriers to entry: low
Nature of substitute products: good substitutes but differentitated
Nature of competition: price, marketing, features
Pricing power: some
face
downward sloping demand curves,
demand curves are highly elastic
short run
maximize economic profit by producing where MR = MC
and by charging price for demand curve => earns
positive economic profit because P exceeds ATC
and due to low barriers to entry, competitors will enter the market
Long run
entry of new firms
shifts the demand curve down to the point where P = ATC - such that economic profit = 0
differencies between long run equilibirum in market with monopolistic competition and perfect competition
in mono:
P > MC
(producers can realize a
markup
- the difference between the selling price of a good or service and cost)
in mono,
ATC is not at a minimum
for quantity produced
(excess capacity, inefficient scale of production)
Product innovation
is a
necessary activity
as firms pursue economic profit
less elastic demand curve
,
enabling them to
increase price
and earn economic profit
costs of product innovation must be weighed against the extra revenue that it produces.
Firm must considered to be spending the optimal amount on innovation when
MC of innovation = MR of additional
Advertising expense
high
- to inform consumers about the unique features of their products and to create or increase a perception of differences
increase the ATC curve
. Because advertising expenses are fixed cost, so ATC will decrease as output increases/
Brand names
many firms spend a significant portion of their advertising budget on brand nam promotion
Oligopoly
Market Characteristiccs
Number of sellers : few firms, firms are interdependent
Barriers to entry: high
Nature of substitute products: very good substitutes or differentiated
Nature of competition: price, marketing, features
Pricing power: some to significant
Kinked demand curve model
based on the assumption that an
incrase in firm's product price will not be followed by its competitor
but
a decrase will
firm believes that demand curve is
more elastic above a given price
than it is
below a given price
we also get a
gap in the associated MR curve
Cournot model
model considers an Oligopoly with
only 2 firms competing (duology),
both have identical and constant MC of production. Each firm knows the quatity supplied by the other firm in the previous and assumes that is what it will supply in the next period
Firms determine their quantites simultaneously each period and under the assumption of Cournot model,
these quantities will change each period untitl they are equal
when
each firm selects the same quantity, there is no longer any additional profit to be gained by changing quantity
and have a stable equilibrium
more firms are added to model, the equilibrium market price falls toward MC
, which is equilibrium price in the limit as the number of firms get large
Nash equilibrium
A Nash equilibirium is reached when
the choices of all firms are such that there is no other choice that makes any firm better off
(increases profits or decreases losses)
Collusive agrrements (thông đồng)
: firms can enter into and enforce an
agreement to restrict output and charge higher prices
, and share the resulting profits. Opec oil cartel is an example
Collusive agreements to increase price in an oligopoly market will be more succesfull when
fewer firms
products are more similar
cost structures are more simillar
Purchases are relatively small and frequent
Retaliation by other firms for cheating is more certain and severe
less actual or potential competition from firm outside the cartel
Dominant firm model
there is
a single firm has a significant large market share
because of
its greater scale and lower cost structure
- the domiant firm (DF)
market price is essentially determined by the dominant firm
, other competitve firms (CF) take this market price as give
a
price decrease by one of the competitive firms
, which increases Quantity CF in the short run
will lead to a decrease in price by dominant firm and competitve will decrease output or exit the industry in long run
Monopoly and Concentratrion
faces a
downward sloping demand curve
for product, so
profit maximization involves trade off between price and quantity
sold if the firm sells at the same price to all buyers
Marker Characterestic
Number of sellers : single firm
Barriers to entry: very high
Nature of substitute products: no good substitutes
Nature of competition: advertising
Pricing power: significant
Long run positive economic profit can exist
and monopolists want to
maximize the profit not the high price
economic profit = (P - ATC)
Q*
Two pricing strategies possible
Single Price
profit maximizing output as that output for which MC = P x (1 - 1/Ep)
where P is current price, Ep is the absolute value of price elasticity of demand
Price Discrimination (phân biệt giá)
the practice of
charging different consumers different prices for the same product or service
the seller must
face a downward sloping demand curve
have at
least 2 identifiable groups of customers with different price elastictites of demand for product
be able to
prevent customer paying the lower price from reselling the prodcut to the customer paying the higher price
deadweight loss
: reducres the sum of consumer and producer surplus (thặng dư kinh tế) by an amount
Monopolists are the
price searchers
and have
imperfect information regarding market demand
Natural Monopoly
when the
AC of production for a single firm is falling throughout the relevant range of customer demand
, we say that the industry is a natural monopoly
large economic scale
in an industry present
significant berriers to entry
regulators often attemp to increase competition and efficiency through efforts to reduce artifical berriers to trade
, such as licensing requirements, quotas and tariffs
average cost pricing
is the most common from of regulation. It forces monopolists to reduce price
increase output and decrease price
increase social welfare (allocative efficiency)
ensure the monopolist a normal profit because P = ATC
Marginal cost pricing
refer to as efficient regulation, forces the monopolist to reduce price
causes the monopolist to
incur a loss because P < ATC
.
a solution
requires a government subsidy (trợ cấp) in order to provide a firm with a normal profit
sell the monopoly right to the highest bidder
Supply function
can't construct a function of quantity supplied as function of price, where P = MR
quantitiy supplied depends not only on a firm's MC, but on demand and MR (which change with quantity) as well
Concentration measure
regulators often
use % of market sales (market share)
to measure the degree of monopoly or market power of firm
mergers or acquisitions of companies in the same industry or market are not permitted by government authorities when
they determine the market share of the combined firm will be too high
and detrimental (bất lợi) the economy
used as indicator of market power
N firm concentration ratio
sum or % market shares of the largest N firms in a market
it doesnt
directly measure market power or elasticity of demand
it may be relatively
insensitive to mergers of 2 firms with large market share
Herfindahl Hirschman Index (HHI)
sum of the squares of the market shares of the largest N firms in the market
limitation for both measures is that barriers to enry are not considered in either case. Even a firm with high market share may not have much pricing power if barriers to entry are low