FUNDAMENTALS OF MANAGERIAL ECONOMICS 8th Edition

By Mark Hirschey

Competitive Markets
Chapter 10

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

Chapter 10 KEY CONCEPTS

market structure market potential entrant product differentiation competitive markets barrier to entry barrier to mobility barrier to exit perfect competition price takers

normal profit economic profit economic losses marginal analysis competitive firm short-run supply curve competitive firm long-run supply curve.

Competitive Environment

What is Market Structure?

Market structure is the competitive environment. Number of buyers and sellers. Potential entrants. Barriers to entry and exit, etc. Competition comes from actual and potential competitors. Potential entrants often affect price/output decisions.

Vital Role of Potential Entrants

Factors that Shape the Competitive Environment

Product Differentiation

R&D, innovation, and advertising are important in many markets. Economies of scale can preclude small-firm size. Barriers to entry and exit can shelter incumbents from potential entrants. Powerful buyers can limit seller power.

Production Methods

Entry and Exit Conditions

Buyer Power

Competitive Market Characteristics

Basic Features

Many buyers and sellers. Product homogeneity. Free entry and exit. Perfect information. Agricultural commodities. Prominent markets for intermediate goods and services. Unskilled labor market.

Examples of Competitive Markets

Profit Maximization in Competitive Markets

Profit Maximization Imperative

Normal profit is return necessary to attract and maintain capital investment. Efficient firms can earn normal profit. Inefficient firms suffer losses. Set M = MR MC = 0 to maximize profits. MR=MC when profits are maximized.

Role of Marginal Analysis

Marginal Cost and Firm Supply

Short-run Firm Supply

Competitive market price (P) is shown as a horizontal line because P=MR. Firms marginal-cost curve shows the amount of output the firm would be willing to supply at any market price. Marginal cost curve is the short-run supply curve so long as P > AVC .

Long-run Firm Supply

Marginal cost curve is the long-run supply curve so long as P > ATC. In long run, firm must cover all necessary costs of production and earn a normal profit.

Competitive Market Supply Curve

Market Supply With a Fixed Number of Competitors

Supply is the sum of competitor output. Entry results in more firms, increased output, a rightward shift in the supply curve, and drives down prices and profits. Exit reduces the number of firms, decreases the quantity of output, shifts the supply curve leftward, and allows prices and profits to rise for remaining competitors.

Market Supply With Entry and Exit

Competitive Market Equilibrium

Balance of Supply and Demand

Equilibrium is a balance of supply and demand. With a horizontal market demand curve, MR=P. P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.

Normal Profit Equilibrium