In this segment we want to examine the theoretical implications of market structure for market performance

Theory predicts that “competitive” markets lead to socially efficient resource allocation. By contrast, imperfectly competitive market structures result in resource misallocation. We want to lay out this argument in a formal way.

Definitions P is market price measured in dollars, yen, lira,... Q is market quantity measured in units, tons, bushels,... TR is total revenue from the sale of goods or services AR is average revenue MR is marginal revenue--the increment to total revenue attributable to the last unit sold.

Note that: and (1) (2) (3)

Definitions, part 2 TC is total cost--the total cost of producing a given quantity of output measured in dollars, yen, lira,... ATC is average total cost or cost per unit of output produced. MC is marginal cost--the increment to total cost attributable to the last unit produced. Note that: and (4) (5)

Definitions, part 3 P c is the competitive price--the price that would prevail in equilibrium in a competitively structured market. Q c is the competitive output-the output that would prevail in equilibrium in a competitively structured market. P M is the monopoly price--that price that would prevail in equilibrium in a monopolistically structured market. Q M is the monopoly output-- the output that would prevail in equilibrium in a monopolistically structured market.

Definitions, part 4 CS is consumer surplus--the difference between what consumers are willing to pay to get a given quantity of a good or service and what they actually pay for that quantity PS is producer surplus--the difference between the total revenue received by sellers and the minimum revenue that would be sufficient to induce sellers to offer that quantity for sale on the market. TS is the total surplus--the sum of CS and PS, that is:

Resource allocation is socially efficient, or Pareto optimal, if a reallocation of existing resources could not make any one person better off without making at least one other person worse off. The necessary condition for allocative (Pareto) efficiency is: in all markets P = MC

Demand curve as schedule of marginal benefits (MB) Price/bushel ($) Quantity/bushels 0 Market price is an index of the benefits derived from the production/consumption of the marginal unit The 51st bushel adds $13 to society’s benefits. The 117th bushels adds $9 to society’s benefits from apples.

Price Quantity 0 F K Q1Q1 Q2Q2 QCQC C D = AR = MB S =  MC EPCPC A PS = CP C E CS = P C AE TS = PS + CS = CAE Vertical distance FK is the excess of benefits over costs for the marginal unit when Q = Q 1

Price, Cost MR Competitive supply curve 0 QMQM QCQC Quantity D = AR ATC = MC K A B E PCPC PMPM