Market Structure is Important for Two Reasons It influences firm Behavior & Profitability It Influences Economic Performance Which Markets Perform Well Which should be Regulated We divide markets according to: Number of Competitors Barriers to Entry Types of Products Chapter 7 slide 1 Firms 1 Few Many Monopoly Oligopoly Perfect Competition Barriers to Entry High Medium None PERFECT COMPETITION

Pairs of Shoes Price Supply Demand BASICS OF SUPPLY & DEMAND The competitive equilibrium occurs at P = $25 and Q = 8 thousand shoes. $25 The increase (shift) in demand results in a higher price and a greater output. 7.2

Pairs of Shoes Price Supply Demand SUPPLY & DEMAND $25 The fall in the marginal cost of production causes a favorable shift in supply and a lower price accompanied by greater output. 7.3

7.4 AC MC Output Revenue & Cost per unit P = $8 Each firm is a price taker (MR = P). Firm Behavior PERFECT COMPETITION Each firm sets its Q F such that P = MC. P = MR = MC = AC MIN QFQF In long-run equilibrium, price is bid down until: QFQF P = $6

7.5 | | Supply Curve before Entry D $8 $6 $4 D’D’ Supply Curve after Entry Perfect Competition: Industry Outcome The long-run result (after entry) is: Initial Equilibrium: P = $6 & Q = 200. After an increase in demand, the short-run result (before entry) is: P = $8 & Q = 240. P = $6 & Q = 280.

7.6 PRIVATE MARKET EFFICIENCY The Argument goes back to Adam Smith ’ s “ Invisible Hand ” Metaphor. Competitive Markets Provide the “ Right ” Amounts of Goods and Services that People Want and at Least Cost. We ’ ll Sketch the Argument Starting with: Individual Transactions and Building up to Competitive Markets.

A DAY-CARE EXAMPLE 7.7 Parents of a Two-Year Old are Willing to Pay $8 per hour for up to 10 hours of Day Care per Week. The Granny Down the Street will provide Care for $4 per Hour. Can the Parties bargain to a mutually beneficial agreement? Yes $ | | | | | | Granny ’ s Cost Couple ’ s Maximum Value Producer Profit $20 per Week Consumer Surplus $20 per Week Consumer Surplus $20 per Week Producer Profit $40 per Week P = $ What if a second couple is willing to pay $10 per hour?

A COMPETITIVE DAY-CARE MARKET | | | | | | | Regional Day-Care Demand $2.50 “ Store-Bought ” Day Care Day-Care Supply Grandmothers Q C = 9.5 All Buyers Pay Same Price. High Valuers Obtain Day Care. Low-Cost Firms Supply Day Care. The Competitive Quantity is Efficient. MB MC

TRADE BARRIERS & DEADWEIGHT LOSS US Demand $15 US Supply $12.50 US Imports World Price under Free Trade Deadweight loss under trade prohibition is greater than w/ a $1.50 tariff. US Demand $15 US Supply $12.50 World Price under Free Trade $14 DWL Imports 18 22