Competition

Market Structures

Perfect Competition No single producer or consumer has any control over the price or quantity of the product.

Perfect Competition Perfectly competitive firms are pretty much faceless. They have no brand image, no real market recognition. A perfectly competitive firm is one whose production is so small in relation to market volume that its production decisions have no perceptible impact on price.

Market Power Market power is the ability to alter the market price of a good or service: – A college book store or a national auto supply store has market power.

No Market Power The production of a lone, perfectly competitive firm is so small relative to market supply that it has no significant effect on the total quantity or price in the market. - Mom and Pop stores

Monopoly A monopoly firm is one that produces the entire market supply of a particular good or service: – It is a price setter. – It increases or reduces output until consumers in a market pay the price it wants.

Imperfect Competition Imperfect competition is between the extremes of monopoly and perfect competition: – Duopoly: only two firms supply a product. – Oligopoly: a few large firms supply all or most of a particular product. – Monopolistic competition: many firms supply essentially the same product but each has brand loyalty.

Output and Revenues Total revenue is the price of a product multiplied by the quantity sold in a given time period: Total revenue = price x quantity

Revenues vs. Profits Profit is the difference between total revenue and total cost. Maximizing production or revenue is not the way to maximize profits. Total profits depend on how both revenues and costs increase as production expands.

Profit Maximization and Price To maximize profit, the firm should produce an additional unit only if it brings in more revenue than it costs.

Profit-Maximizing Rate of Production Never produce anything that costs more than it brings in.

Total Profit Total profit can be computed in one of two ways: Total profit = total revenue – total cost OR Total profit = average profit (profit per unit) x quantity sold

Supply Behavior How firms make production decisions helps explain how the market establishes prices and quantities. Supply is the ability and willingness to sell specific quantities of a good at alternative prices in a given time period.

Supply Shifts Important influences on cost (and supply behavior) are: –The price of resources –Technology –Expectations

Market Supply Market supply is the total quantity of a good that sellers are willing and able to sell at alternative prices in a given time period.

Competitive Market Supply Determinants of the market supply of a competitive industry: –The price of factor inputs –Technology –Expectations –The number of firms in the industry

New Businesses New businesses continue to enter a competitive industry so long as profits exist.

When Businesses Close Businesses leave the industry when profit opportunities look better elsewhere.

Competition The market helps signal what should and should not be produced.

Maximum Efficiency Competitive pressure on prices forces suppliers to produce at the least possible cost. Society gets the most it can from its available (scarce) resources.

Economic Losses Economic losses are a signal to producers that they are not using society’s scarce resources in the best way.

The Profit Squeeze High profits in a particular industry indicate that consumers want a different mix of production. As more businesses enter the industry, consumers get their desired mix of production. They get more of the goods they desire at a lower price.

Policy Perspective Competitive markets present a strong argument for laissez faire (where government does not interfere in business decisions). Government should promote competition because markets do a good job of allocating (distributing) resources. This means keeping markets open and accessible to new entrants by breaking down barriers to new businesses.