MANAGERIAL ECONOMICS 12th Edition By Mark Hirschey

Competitive Markets Chapter 10

Chapter 10 OVERVIEW 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 10 KEY CONCEPTS market structure market potential entrant price takers normal profit economic profit economic losses marginal analysis competitive firm short-run supply curve competitive firm long-run supply curve. market structure market potential entrant product differentiation competitive markets barrier to entry barrier to mobility barrier to exit perfect competition

Competitive Environment What is Market Structure? Market structure describes the competitive environment in terms of: Number of buyers and sellers. Potential entrants. Barriers to entry and exit, etc. Vital Role of Potential Entrants Actual and potential competitors are important. Potential entrants often affect price/output decisions.

Factors that Shape the Competitive Environment Product Differentiation R&D and innovation lead to distinctive products. Advertising builds brand awareness. Production Methods Scale economies can preclude small firm size. Scope economics give multi-product advantages. Entry and Exit Conditions Barriers to entry and exit can shelter incumbents from potential entrants. 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, e.g., cotton. Prominent markets for intermediate goods and services, e.g., discount retailing. Unskilled labor market.

Profit Maximization in Competitive Markets Profit Maximization Imperative Normal profit is 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. Marginal cost schedule is the short-run supply curve so long as P > AVC. Long-run Firm Supply In long run, firm must cover all necessary costs of production and earn a normal profit. Marginal cost curve is the long-run supply curve so long as P > ATC.

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 a rightward shift in the supply curve and drives down prices and profits. Exit 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 There are no economic profits in competitive equilibrium; firms earn a normal rate of return. With a horizontal market demand curve, MR=P, so P=MR=MC=ATC.