1、.Competitive MarketsChapter 7.Chapter 7 OVERVIEWCompetitive EnvironmentFactors That Shape the Competitive EnvironmentCompetitive Market CharacteristicsProfit Maximization in Competitive MarketsMarginal Cost and Firm SupplyCompetitive Market Supply CurveCompetitive Market Equilibrium.Chapter 7KEY CON
2、CEPTS 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 l
3、ong-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 EntrantsCompetition comes from actual and potential competitors.Potential entra
4、nts often affect price/output decisions.Factors that Shape the Competitive Environment Product DifferentiationR&D,innovation,and advertising are important in many markets.Production MethodsEconomies of scale can preclude small-firm size.Entry and Exit ConditionsBarriers to entry and exit can shelter
5、 incumbents from potential entrants.Buyer PowerPowerful buyers can limit seller power.Competitive Market Characteristics Basic FeaturesMany buyers and sellers.Product homogeneity.Free entry and exit.Perfect information.Examples of Competitive MarketsAgricultural commodities.Prominent markets for int
6、ermediate goods and services.Unskilled labor market.Profit Maximization in Competitive Markets Profit Maximization ImperativeNormal profit is return necessary to attract and maintain capital investment.Efficient firms can earn normal profit.Inefficient firms suffer losses.Role of Marginal AnalysisSe
7、t M=MR MC=0 to maximize profits.MR=MC when profits are maximized.Marginal Cost and Firm Supply Short-run Firm SupplyCompetitive market price(P)is shown as a horizontal line because P=MR.Firms marginal-cost curve shows the amount of output the firm would be willing to supply at any market price.Margi
8、nal cost curve is the short-run supply curve so long as P AVC.Long-run Firm SupplyMarginal 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
9、 of CompetitorsSupply is the sum of competitor output.Market Supply With Entry and ExitEntry 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 leftw
10、ard,and allows prices and profits to rise for remaining competitors.Competitive Market Supply Curve Entry and exit in competitive markets will continue until P=AR=MR=MC=ATC.The long-run competitive market supply curve is a horizontal line equal to the market price.Because firms can more easily enter
11、 or exit in the long-run,long-run supply curves tend to be more elastic than short-run supply curves.Competitive Market Equilibrium Balance of Supply and DemandEquilibrium is a balance of supply and demand.Normal Profit EquilibriumWith a horizontal market demand curve,MR=P.P=MR=MC=ATC.There are no e
12、conomic profits.All firms earn a normal rate of return.Problems 1 Florida is the biggest sugar-producing state,but Michigan and Minnesota are home to thousands of sugar beet growers.Sugar prices in the United States average about 20 per pound,or more than double the world-wide average of less than 1
13、0 per pound given import quotas that restrict imports to about 15%of the U.S.market.Still,the industry is perfectly competitive for U.S.growers who take the market price of 20 as fixed.Thus,P=MR=20 in the U.S.sugar market.Assume that a typical sugar grower has fixed costs of$30,000 per year.Total va
14、riable cost(TVC),total cost(TC),and marginal cost(MC)relations are:.TVC=$15,000+$0.02Q+$0.00000018Q2TC=$45,000+$0.02Q+$0.00000018Q2MC=TC/Q =$0.02+$0.00000036Qwhere Q is pounds of sugar,total costs include a normal profit.A.Using the firms marginal cost curve,calculate the profit-maximizing short-run
15、 supply from a typical grower.B.Calculate the average variable cost curve for a typical grower,and verify that average variable costs are less than price at this optimal activity level.Problems 2 The retail market for unleaded gasoline is fiercely price competitive.Consider the situation faced by a
16、typical gasoline retailer when the local market price for unleaded gasoline is$1.80 per gallon and total cost(TC)and marginal cost(MC)relations are:TC=$40,000+$1.64Q+$0.0000001Q2 MC=MTC/MQ=$1.64+$0.0000002Q and Q is gallons of gasoline.Total costs include a normal profit.A.Using the firms marginal c
17、ost curve,calculate the profit-maximizing long-run supply from a typical retailerB.Calculate the average total cost curve for a typical gasoline retailer,and verify that average total costs are less than price at the optimal activity level.Problems 3 Farm Fresh,Inc.,supplies sweet peas to canneries
18、located throughout the Mississippi River Valley.Like many grain and commodity markets,the market for sweet peas is perfectly competitive.With$250,000 in fixed costs,the companys total and marginal costs per ton(Q)are:TC=$250,000+$200Q+$0.02Q2 MC=TC/Q=$200+$0.04Q.A.Calculate the industry price necess
19、ary to induce short-run firm supply of 5,000,10,000,and 15,000 tons of sweet peas.Assume that MC AVC at every point along the firms marginal cost curve and that total costs include a normal profit.B.Calculate short-run firm supply at industry prices of$200,$500,and$1,000 per ton.Problems 4 New Engla
20、nd Textiles,Inc.,is a medium-sized manufacturer of blue denim that sells in a perfectly competitive market.Given$25,000 in fixed costs,the total cost function for this product is described by:TC=$25,000+$1Q+$0.000008Q2 MC=TC/Q=$1+$0.000016Q.where Q is square yards of blue denim produced per month.As
21、sume that MC AVC at every point along the firms marginal cost curve,and that total costs include a normal profit.A.Derive the firms supply curve,expressing quantity as a function of price.B.Derive the market supply curve if New England Textiles is one of 500 competitors.C.Calculate market supply per
22、 month at a market price of$2 per square yard.Problems 5 Big Apple Music,Inc.,enjoys an exclusive copyright on music written and produced by the Fab Four,a legendary British rock group.Total and marginal revenues for the groups CDs are given by the following relations:TR=$20Q-$0.000006Q2 MR=TR/Q =$2
23、0-$0.000012Q Total costs(TC)and marginal costs(MC)for production and distribution are:TC=$6,187,500+$2.5Q+$0.00000275Q2 MC=TC/Q =$2.5+$0.0000055Q and Q is units(CDs).Total costs include a normal profit.A.Use the marginal revenue and marginal cost relations given above to calculate Big Apples CD outp
24、ut,CD price,and economic profits at the profit-maximizing activity level for the period during which the company enjoys an exclusive copyright on the groups material.B.Calculate optimal output and profit levels in the period following expiration of copyright protection based on the assumption that a competitive market where P=MR=$10.75 would result.Is this a stable equilibrium?
