2. Every product is sold in a market that can be considered one of the above market structures. For example: 1.Fast Food Market 2.The Market for Cars 3.Market for Operating Systems (Microsoft) 4.Strawberry Market 5.Cereal Market 1 Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET STRUCTURES

3. Characteristics of Perfect Competition: 1.Many small firms 2 FOUR MARKET STRUCTURES Imperfect Competition Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly

4. Characteristics of Perfect Competition: 1.Many small firms 2.Identical products (perfect substitutes) 3 FOUR MARKET STRUCTURES Imperfect Competition Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly

5. Characteristics of Perfect Competition: 1.Many small firms 2.Identical products (perfect substitutes) 3.Easy for firms to enter and exit the industry 4.Seller has no need to advertise 5.Firms are “Price Takers” The seller has NO control over price. 4 FOUR MARKET STRUCTURES Imperfect Competition Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly

6. Law of One Price Traffic Analogy 5 In an efficient market, all identical goods must have only ONE PRICE. Result: Each firm is a PRICE TAKER. Firms have NO control of the price Switching lanes is not getting your any faster

7. Perfectly Competitive Firms Example: Say you go to Mexico to buy a sombrero. After visiting at few different shops you find that the buyers and sellers always agree on $10. This is the market price (demand & supply meet) 1.Is it likely that any shop can sell sombrero for $20? 2.Is it likely that any shop will sell sombrero for $5? 3.What happens if ONE shop prices sombrero too high? 4.Do these firms make a large profit off of sombrero? Why? These firms are “price takers” because they sell their products at a price set by the market. 6

8. Demand for Perfectly Competitive Firms Why are they Price Takers?  If a firm charges above the market price, NO ONE will buy. They will go to other firms  There is no reason to price low because consumers will buy just as much at the market price. Since the price is the same at all quantities demanded, the demand curve for each firm is…Perfectly Elastic (A Horizontal line) 7

9. P Q Price P Q 5000 D S $10 The Competitive Firm is a Price Taker Price is set by the Industry Industry Firm (Price Taker) Firm (Price Taker) = Demand

10. What is the ADDITIONAL REVENUE for selling an additional unit? 1 st unit earns additional $10 2 nd unit earns additional $10 3 rd unit earns additional $10 MR is constant at $10 Notice:  TR increases at a constant rate  MR equal Average Revenue P Q Demand $10 Firm (Price Taker) Firm (Price Taker) The Competitive Firm is a Price Taker Price is set by the Industry =MR

11. Maximizing PROFIT! 10

12. Short-Run Profit Maximization What is the goal of every business? To Maximize Profit!!!!!!  To maximum profit firms must make the right output 11

13. Lets put costs and revenue together on a graph to calculate profit. 12

14. Total Revenue =$63 $9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 1.How much output should be produced? 2.How much is Total Revenue? 3.How much is Total Cost? 4.Is there profit or loss? How much? MR=D=P Total Cost=$45 Profit=$18 Don’t forget that averages show PER UNIT COSTS 13 Q P MC AVC ATC

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16. Total Revenue=$28 $9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 1.How much output should be produced? 2.How much is Total Revenue? 3.How much is Total Cost? 4.Is there profit or loss? How much? Total Cost=$35 15 Q P ATC MC AVC MR=D=P Loss=$7

17. Assume the market demand falls even more. If the price is lowered from $4 to $2 the firm should stop producing. Shut Down Rule: A firm should continue to produce as long as the price is above the lowest point of AVC When the price falls below the lowest point of AVC then the firm should minimize its losses by shutting down Why? If the price is below the lowest point of AVC the firm is losing more money by producing than they would have to pay to shut down. 16

18. $6 5 4 3 2 1 1 2 3 4 5 6 7 8 17 Q P MC AVC MR=D=P SHUT DOWN! Produce Zero Price at Minimum AVC is SHUT DOWN POINT ATC

19. TC=$30 TR=$15 Cost and Revenue Price < AVC. They should shut down Producing nothing is cheaper than staying open. MR=D=P 18 Q $9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 ATC MC AVC FC=$10 There is still loss of the Fixed Cost

20. Profit Maximizing Rule MR = MC 19

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24. 1.Should the firm produce? 2.What output should the firm produce? 3.What is TR at that output? 4.What is TC at that output? 5.How much profit or loss? ------------Yes --10 ----------TR=$140 ----------TC=$100 ------------Profit=$40 #1 23 $20 15 14 10 6 5 0 Cost and Revenue MR=D= P Q 6 7 10 ATC MC AVC

25. 1.What output should the firm produce? 2.What is TR at that output? 3.What is TC at that output? 4.How much profit or loss? -Zero/Shutdown ---------TR=$45 ---------TC=$55 -----------Loss=$5 (Fixed Cost) #2 24 $15 11 10 9 0 Cost and Revenue MR=D= P Q 5 7 ATC MC AVC

26. 1.What output should the firm produce? 2.What is TR at that output? 3.What is TC at that output? 4.How much profit or loss? --6 ----------TR=$90 ----------TC=$120 -----------Loss=$30 #3 25 $40 30 20 19 15 2 0 Cost and Revenue MR=D= P Q 3 6 7 ATC AVC MC