Marketing (425 AEC)

Part Two: Market Structure Lecture 1

Dr. Mahmoud Arafa

This lecture focus on

Market Structure Identification. Comparing Four Market Structures. Characteristics Of Perfect Competition Market.

Market Structure
The selling environment in which a firm produces and sells its product is called a market structure.
Defined by three characteristics: The number of firms in the market The ease of entry and exit of firms The degree of product differentiation

Market Structure
Market structure identifies how a market is made up in terms of:
The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms behaviour pricing strategies, non-price competition, output levels The extent of barriers to entry The impact on efficiency

Perfect Competition

Introduction

Pure Monopoly

More competitive (fewer imperfections)

Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites (Q). Monopolistic competition and oligopoly lie between these two extremes.

Market Structure
Perfect Competition Pure Monopoly

Monopolistic Competition

Oligopoly

Duopoly Monopoly

The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Market Structure
Characteristics: Look at these everyday products what type of market structure are the producers of these products operating in? (Just to think about)
Electric Guitar Jazz Body

Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry. You might even have to ask what the industry is??

Mercedes CLK Coupe

Canon SLR Camera Bananas

Comparing Market Structures

Perfect Competition Monopolistic Competition Many / Several Oligopoly Monopoly Number of Firms Very Many Few One

Freedom of Entry

Unrestricted

Unrestricted

Restricted

Restricted or Completely Blocked

Nature of Product

Homogeneous

Differentiated

Undifferentiated or Differentiated

Unique

Implications of Demand Curve

Horizontal: Firm is a Downward Sloping price taker but Relatively Elastic

Downward Sloping. Downward Sloping Kinked Shape. More Inelastic Than Relatively Inelastic. Oligopoly. Firm Has (Shape depends on Considerable Control rivals reactions) Over Price.

Comparing Market Structures

Perfect Competition
Monopolistic Competition

Oligopoly

Monopoly

Average Size of Firms

Small and Large (Economies of scale will encourage growth)

Small and Large

Large

Small or Large

Possible Consumer Demand

Elastic

Elastic, Firms face Individual Demand curves

Consumer demands factors Consumers are include advertising limited to one choice and pricing from rival firms

Profit Making Possibility

Normal Profits

Normal Profits

Normal and Economic Economies of Scale. Profit(Depends on Normal and Economic reactions of price Profits in short and setting by rivals) Long Run

Comparing Market Structures

Perfect Competition Monopolistic Competition Oligopoly Monopoly Anti-Monopoly Legislation. Profits Taxes. Sales Taxes. Price Setting. Nationalization

Government Intervention

Price Floors and Ceilings

Government May Limit Entry

Highly Unregulated Resulting in Cartels

Efficiency

Productively (P=Min Productively and AC) and Allocatively Allocatively Inefficient Efficient (P= MC)

Productively and Allocatively Inefficient. Technological Development May Push Costs Down

Productively and Allocatively Inefficient

Examples

Corn, Onions, Broccoli

Gas Stations, Convenience Stores, Night Clubs

Cable, Phone and Internet Providers

Public Transit, Utilities

Perfect Competition
A perfectly competitive market has

the following characteristics:

1. The product of any one seller is the same as the product of any other seller. The price then is the same , buyers do not care whether they purchase the product from one seller or another.

Perfect Competition
A perfectly competitive market has

the following characteristics:

2. Each participant in the market, seller or buyer, to be so small , in relation to the entire market, small then he/she can not affects the product's price. the product's price But if all producers act together, changes in out put will certainly affect the price. This mean that Horizontal. the firm's demand is horizont.al.

Perfect Competition

Perfect Competition

3. All Resources be completely mobile (enter or mobile leave the market) and switch from one use to another. For example, Labor must be able to move from region to region and from job to job..

Perfect Competition
4. consumer, firms, and suppliers have perfect information of the relevant economic and technological data.
consumer Aware of All prices How much their resources will bring in all possible uses Know the prices of all inputs and the characteristics of all relevant technologies.

suppliers

Aware of

Firms

Aware of

Perfect Competition
Having described these four requirements, it is obvious that no industry is perfect competition.

Question: there are no industry is perfect competition (Discuss). Mention the perfect competition market characteristics

Profit-Maximizing Level of Output

The goal of the firm is to maximize profits. Profit is the difference between

total revenue and total cost.

Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold.

TR = (P X Q)

Revenue of a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold.

MR =TR/ Q

Revenue of a Competitive Firm

For competitive firms, marginal revenue equals the price of the good. MR = P

Total, Average, and Marginal Revenue for a Competitive Firm

Quantity (Q) 1 2 3 4 5 6 7 8 Price (P) $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 Total Revenue Average Revenue Marginal Revenue (TR=PxQ) (AR=TR/Q) (MR=TR/ Q ) $6.00 $6.00 $12.00 $6.00 $6.00 $18.00 $6.00 $6.00 $24.00 $6.00 $6.00 $30.00 $6.00 $6.00 $36.00 $6.00 $6.00 $42.00 $6.00 $6.00 $48.00 $6.00 $6.00

Profit Determination Using Total Cost and Revenue Curves

TC
$385 350 315 280

TR

Loss
Maximum profit =$81 Profit =$45

Profit

Total cost, revenue

245 210 175 140 105

70 35 0

$130

Loss
1 2 3 4 5 6 7 8 9
Quantity

l/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Profit-Maximizing Level of Output

Marginal revenue (MR ) the change in total revenue associated with a change in quantity. Marginal cost (MC ) the change in total cost associated with a change in quantity.

A firm maximizes profit when MC = MR.

How to Maximize Profit

If MR does not equal MC, a firm can increase profit by changing output. TR/ Q TC/ Q The supplier will continue to produce as long as MC is less than MR.

How to Maximize Profit

The supplier will cut back on (Decreases) Production if MC is greater than MR. Thus, the profit-maximizing condition of a competitive firm is MC = MR = P.

Profit Maximization: Using MR and MC curves

Profit is maximized when MR=MC. If the cost of producing one more unit is less than the revenue it generates, then a profit is available for the firm that increases production by one unit.

Profit Maximization: Using MR and MC curves If the cost of producing one more unit is more than the revenue it generates, then increasing production reduces profit.

Question: Discuss using MC, MR, and output curves, that the profit-maximizing condition of a competitive firm is MC = MR = P.

Profit Maximization By Numbers

MR=MC
Q 0 1 2 3 P $1 $1 $1 $1 TR $0 $1 $2 $3 TC $1.00 $2.00 $2.80 $3.50 TR-TC -$1.00 -$1.00 -$0.80 -$0.50 MR $1 $1 $1 $1 $1.00 $0.80 $0.70 $2.00 $1.40 $1.17 MC ATC

4
5 6 7 8 9

$1
$1 $1 $1 $1 $1

$4
$5 $6 $7 $8 $9

$4.00
$4.50 $5.20 $6.00 $6.86 $7.86

$0.00
$0.50 $0.80 $1.00 $1.14 $1.14

$1
$1 $1 $1 $1 $1

$0.50
$0.50 $0.70 $0.80 $0.86 $1.00

$1.00
$0.90 $0.87 $0.86 $0.86 $0.87

10
11

$1
$1

$10
$11

$9.36
$12.00

$0.64
-$1.00

$1
$1

$1.50
$2.64

$0.94
$1.09

The Marginal Cost Curve Is the Supply Curve

The MC curve is the firm's supply curve above the point where price exceeds AVC curve. The MC curve tells the competitive firm how much it should produce at a given price.

P, C
a

MC

P
A

S1

$10
b c AVC d ATC

S2 P=MR0 B

ATC =$7

P=MR1

D0 q4 q3 q2 q1 10 units

Q1

Q2

QM

MC, ATC, AVC curves

The marginal cost curve is the firm's supply curve above the point where price exceeds average variable cost.
Costs and Revenue

MC ATC AVC

Q 0

Determining Profit and Loss

Find output where MC = MR (P).

Costs and Revenue

MC MR

The intersection of MC = MR (P) determines the quantity the firm will produce if it wishes to maximize profits.

Q 0

Determining Profit and Loss

Find profit
Costs and Revenue

Drop a line down from where MC equals MR, MR = P2 and then to the ATC curve. MR =P1 This is the profit per unit. Extend a line back to the vertical axis to identify total profit. 0

MC MR ATC
Total Profit

Q2

Determining Profit and Loss

The firm makes a profit when the MR = P2 ATC curve is below the MR curve. MR =P1 Inverse The firm incurs a loss when the ATC curve is above the MR curve.
0
Costs and Revenue

MC MR ATC
Total Profit

Q2

Zero profit
Zero profit or loss where MC=MR.
Firms can earn zero profit or even a loss where MC = MR. Remember that: Profit = TR - TC Profit per unit = MR - MC

Determining Profit and Loss From a Table of Costs

Profit can be calculated from a table of costs and revenues. Profit is determined by total revenue minus total cost.

Profit Maximization for to a Firm Costs Relevant a Competitive Firm

Total P = MR Output Total Cost Marginal Average Cost Total Cost Revenue Profit TR-TC

35.00 35.00 35.00 35.00 35.00 35.00

McGraw-Hill/Irwin

0 1 2 3 4 5 6

40.00 68.00 88.00 104.00 118.00 130.00 147.00

28.00 20.00 16.00 14.00 12.00 17.00

68.00 44.00 34.67 29.50 26.00 24.50

0 35.00 70.00 105.00 140.00 175.00 210.00

40.00 33.00 18.00 1.00 22.00 45.00 63.00

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Profit Maximization for Competitive Costs Relevant ato a FirmFirm

Total P = MR Output Total Cost Marginal Average Cost Total Cost Revenue Profit TR-TC

35.00 35.00 35.00 35.00 35.00 35.00 35.00

McGraw-Hill/Irwin

4 5 6 7 8 9 10

118.00 130.00 147.00 169.00 199.00 239.00 293.00

14.00 12.00 17.00 22.00 30.00 40.00 54.00

29.50 26.00 24.50 24.14 24.88 26.56 29.30

140.00 175.00 210.00 245.00 280.00 315.00 350.00

22.00 45.00 63.00 76.00 81.00 76.00 57.00

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Determining Profit and Loss From a Graph

(a) Profit case (b) Zero profit case Price 65 60 55 50 45 40 35 30 25 20 15 10 5 0 (c) Loss case MC MC MC Price Price 65 65 60 60 55 55 50 50 ATC 45 45 40 D A P = MR 40 35 35 P = MR Profit 30 30 B ATC 25 C 25 AVC AVC E 20 20 15 15 10 10 5 5 0 0 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 Quantity Quantity
Irwin/McGraw-Hill

ATC
Loss P = MR AVC

1 2 3 4 5 6 7 8 9 10 12 Quantity

The McGraw-Hill Companies, Inc., 2000

The Firm's Shutdown Decision

The shutdown point is the point below which the firm will be better off if it shuts down than it will if it stays in business Shut down if TR < TVC Shut down if MR < MC Shut down if P < ATC
MC Price 60 50 40 30 20 10 0 2 4 6 8 Quantity Loss P = MR AVC ATC

The Firms Decision to Enter a Market

A firm will enter the industry if such an action would be profitable.

TR > TVC MR > MC P > ATC

Thank You And Best Wishes