1. MANAGERIAL ECONOMICS 12th EditionBy
Mark Hirschey

2. Competitive Markets
Chapter 10

3. 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

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

11. 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.

14. 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.

17. 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.