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
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
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.
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
Buyer Power
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.
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.
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 .
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.
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.
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.