KINH TẾ VI MÔ Chapter 6 market structure

CHAPTER 6MARKET STRUCTURE Content Perfect competition Monopoly Monopolistic competition Oligopoly... Market- Where all activities in economy are price-led MARKET STRUCTURE MARKET STRUCTU

CHAPTER 6

MARKET STRUCTURE

Content

Perfect competition

Monopoly

Monopolistic competition

Oligopoly

1 Market

- Where all activities in economy are price-led

MARKET STRUCTURE

MARKET STRUCTURE

PERFECT

COMPETITION

IMPERFECT COMPETITION

MONOPOLY

MONOPOLISTIC

MARKET STRUCTURE

Types of market

Perfect competition

Monopolistic competition Oligopoly Monopoly

Number of suppliers

Products

Entry barrier

Market power

Non-price

competition

Unlimited Several Few One

Identical Different Identical/

Different Unique

Very high

High Low

None

Very strong Strong

Weak None

None Little Much None

I PERFECT COMPETITION

1. Definition

- A type of market where there are unlimited suppliers and their products are identical

- Examples: Agricultural products

2 Characteristics

- Suppliers are price-taker

- No entry barrier

- No market power

- Symmetric information

- No non-price competition (no advertisement)

- Not necessary to choose supplier

PERFECT COMPETITION

3 Demand and marginal

revenue curves

- Demand curve: parallel

with horizontal axis

- Marginal curve: coinciding

with demand curve

- →MR = P = AR

P =MR = AR

P

Q P*

PERFECT COMPETITION

4 Maximizing profit

ΠMAX: MR=MC

In perfect competition: MR = P

⇒ΠMAX in perfect competition:

P=MC

MC

P=MR P*

P

5 Break-even, shut down point

Π = TR – TC = Q (P - ATC)

P> ATCmin→ Π > 0 → profit

P= ATCmin→ Π = 0 → break-even point

P< ATCmin→ Π < 0 → loss

AVCmin< P < ATCmin→continue producing

P < AVCmin→shut down

PERFECT COMPETITION

5 Break-even, shut

down point

P> ATCmin

TR = P*AQ*O

TC = OCBQ*

→Π= P*ABC

MC

P=MR P*

P

A

O

ATC

B C

Πmax

PERFECT COMPETITION

5 Break-even, shut

down point

P= ATCmin

TR = P*AQ*O

TC = P*AQ*O

⇒ Q*: break-even point

MC

P=MR P*

P

A

O

ATC

PERFECT COMPETITION

MC

P=MR P*

P

5 Break-even, shut

down point

P< ATCmin

TR = P*AQ*O

TC = OCBQ*

→ - Π = P*ABC

C

B

O

A

-Π

ATC

PERFECT COMPETITION

MC

P=MR P*

P

5 Break-even, shut

down point

AVCmin< P < ATCmin

TR = P*AQ*O

TC = OCBQ*

* Continue: Lose -Π= P*ABC

* Stop: Lose FC = BCEF

⇒ FC > -Π

⇒ Continue producing

B C

A

AVC ATC

5 Break-even, shut down

point

P < AVCmin

TR = P*AQ*O

TC = OCBQ*

* Continue: Lose -Π= P*ABC

* Stop: Lose FC = BCEF

FC < -Π

→Stop producing

(shut down point)

MC

P=MR P*

P

AVC ATC

F A

O

E

C

B

6 Supply curve

- Coinciding with MC,

but from AVCmin

MC

P=MR P*

P

PERFECT COMPETITION

AVC

PERFECT COMPETITION

7 Producer’s surplus

(PS)

- The area below price

line and above marginal

cost curve

PS = TR – VC

= Π + FC

PS P

Q Q*

P*

P=MR MC

EXERCISE

Total cost function of a perfect competition firm is:

TC = Q2 + Q + 100

a At P = 27$, state out Q* and ΠMAX

b State out the break-even point of this firm

c At P = 9$, should this firm close its business?

d Show this firm’s supply curve

1. Definition

- A type of market where there is only one supplier and the product is unique

- Examples:

2 Reasons of monopoly

- Economy of scales

- Stipulated by government

- Owning patterns, license…

- Monopoly in inputs

- Monopoly in location

MONOPOLY

3 Demand and marginal

revenue curves

- Demand curve: downward

sloping and relatively steep

- Marginal revenue curve:

downward sloping, is twice

as steep as the slope of the

demand curve (and the

same intercept)

P = -aQ + b

MR = -2aQ + b

P

Q D MR

4 Maximizing

profit

ΠMAX: MR=MC

P

Q

D

MR

MC

Q*m

P*m

Πmax: MR=MC

ATC

Π MAX

MONOPOLY

P

Q

D MR

MC

Q*

P* m

P* c

Q*

P*m>>P*c

Q*m<<Q*c

Πmax: MR=MC

Perfect competition

- CS: a+b+c

- PS: d+e

Monopoly:

- CS: a (lose b+c)

- PS: e+b

(gain b, lose d)

→d+c: Dead weight loss

(DWL)

P

Q

D MR

MC

Q* m

P* m

P* c

Q* c

P*m>>P*c Q*m<<Q*c

Πmax: MR=MC

d e

MONOPOLY

5 Supply curve of a monopolist

P changes, Q is constant P is constant, Q changes

P

Q

D 1

MR 1

MC

P

D 1

MR 1

MC

MR 2

D 2

Q*

P* 1

P* 2

P*

MR 2

D 2

- No 1:1 relationship between price and

quantity

- → No functional relationship between price and quantity

- → No supply curve in monopoly

MONOPOLY

5 Supply curve of a monopolist

MONOPOLY

6 Market power

- Found in 1934 by Abba Lerner

(0 ≤ L ≤ 1)

- In perfect competition: P = MC →L = 0

- The higher value of L is, the stronger market power a firm can gain

P

MC P

A monopolist is facing with a demand curve:

P = 18 – 2Q

and total cost function: TC = Q2

a State out P*, Q* and Π *MAX

b Government imposes 3$/ unit tax on producer What is new P**, Q** and Π **MAX

c Government imposes a fixed tax amount of 10$ on producer Compare P***, Q*** and Π ***MAX with P*, Q* and Π *MAX in question a