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Types of Market Structure

by: Crystal Boutwell

Types of Market Structure ECON 2020 - 4

Marketplace > Auburn University > Economcs > ECON 2020 - 4 > Types of Market Structure
Crystal Boutwell
GPA 3.82

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About this Document

This material is for exam four in Macy Fink's Microeconomics class. It covers lectures 1-3.
Principles of Microeconomics
William Macy Finck
Class Notes
Microecon, Fink, Microeconomics, Econ, market structures, perfect competition, perfect substitutes, Economics, Social Welfare, shutdown rule
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This 8 page Class Notes was uploaded by Crystal Boutwell on Sunday April 3, 2016. The Class Notes belongs to ECON 2020 - 4 at Auburn University taught by William Macy Finck in Fall 2015. Since its upload, it has received 40 views. For similar materials see Principles of Microeconomics in Economcs at Auburn University.


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Date Created: 04/03/16
Exam4Lecture1 1 Types of Market Structures 1. Perfect Competition: many firms, perfect substitutes 2. Monopolistic competition: many firms, close substitutes, Ex: McDonalds and BK. 3. Oligopoly: few firms, most realistic, most complicated 4. Monopoly: one firm, no competitor 2 Perfect Competition Characteristics Implications 1. Many small buyers and sellers No individual can effect Pe or Qe 2. Standardized products (perfect subs) Firm elastic demand = infinity; no advertising. 3. Perfect information Firms are price takers (set q only) 4. No barriers to entry Long Run profit = 0. 2.1 Profit Maximization (for every market structure)  Profit = Total Revenue (TR) – Total Cost (TC)  When a firm produces and sells an additional unit of a good, TR and TC both increase. This has a variable effect on profit.  If change in TR is greater than/equal to change in TC, the unit will be produced.  Change in TC = Marginal Cost (MC)  Change in TR = Marginal Revenue (MR)  Marginal revenue: the additional revenue earned from selling 1 additional unit. 2.1.1 Marginal Revenue  Firms in a perfectly competitive market are price takers, the price along the demand curve never changes.  MR = price at every additional unit.  D= MR  Profit maximizing level of output o If MR > MC, the firm will increase q. o IF MR < MC, the firm will decrease q. 2.1.2 THE KEY TO EVERYTHING EVER  Profit Maximization Rule: Firms find the profit-maximization level of output where MR = MC. 2.2 Solving for q* and profit. Example:  P= $30; MC = 2+ 4q.  Find q* Solution:  MR = P = MC  $30= 2 + 4q  q*=7 units Find profit if ATC is $25.  Profit = TR –TC  TR = ( P * Q)  TC = (ATC * q)  Profit = (P*q)-(ATC*q)=q(P-ATC)=7(30-25)=35. Exam4Lecture2 2.3 Identifying SR profit  Everything that matters happens at q*/  Profit is positive if Price isgreater than ATC 2.4 Breaking Even (P = ATC) 2.5 Negative Profit Should we shutdown? 2.6 Shutdown Rule TFC will remain even if you shut down.  If P >/= AVC, then the firm should produce q* where MC=MR.  If P < AVC, then the firm should shutdown, q* = 0. 2.7 Long Run competitive equilibrium Necessary conditions 1. The market clears ( Qs =Qd) 2. Profit =0; P=ATC (otherwise people can leave/enter the market) Reasons for entry/exit 1. Change in Demand 2. Change in costs 2.7.1 KNOW ALL OF THESE FOLLOWING GRAPHS FOR SURE!!! Decrease in Demand 1. Demand decreases 2. P and q decrease 3. D=MR decreases 4. Q* decreases, profit is less than zero. 5. Exit of other firms (supply decreases) 6. Q falls and P returns to original 7. P=MR returns to original 8. Q* returns to original; profit =0. Increase in Demand  Demand increases  P and Q increase  D = MR increases  Q* increases; profit is greater than 0. This attracts firms from other markets.  Entry of firms ( S increases)  Q rises, and P returns to original  d=Mr returns to original  q* returns to original; profit = 0. Increase in costs 1. MC and ATC increase 2. Q* decreases; profit is less than zero 3. Firms exit (S decreases) 4. Q falls and P rises 5. D=MR increases 6. Q* increase; profit equals zero again. Decrease in costs  MC and ATC decrease  Q* increases, profit is positive  Entry of other markets (S increase)  Q rises, P falls  D=MR decreases  Q* decreases, profit = 0. 2.8 How does this effect social welfare? *this is the only market structure where P = Min ATC. Productive efficiency: 1. P= min ATC 2. Opportunity cost of resources is minimized 3. Output of all other goods is maximized *At q*, P = MC, only market structure where this happens. Allocative efficiency: 1. P = MC 2. Everyone that is willing to pay at least the MC will get the good. This market does the best job at getting the most goods in to the most hands.


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