Unit6 Chapter10 Hirschey Lecture

8/3/2019 Unit6 Chapter10 Hirschey Lecture

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FUNDAMENTALS OFFUNDAMENTALS OF

MANAGERIALMANAGERIALECONOMICSECONOMICS

88thth EditionEditionByBy

Mark HirscheyMark Hirschey


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Competitive MarketsCompetitive MarketsChapter 10Chapter 10


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Chapter 10Chapter 10

OVERVIEWOVERVIEW Competitive Environment

Factors That Shape the Competitive

Environment Competitive Market Characteristics

Profit Maximization in CompetitiveMarkets

Marginal Cost and Firm Supply

Competitive Market Supply Curve

Competitive Market Equilibrium


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Chapter 10Chapter 10

KEY CONCEPTSKEY 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 supplycurve

competitive firmlong-run supplycurve.


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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.

Vital Role of Potential Entrants Competition comes from actual and potential

competitors. Potential entrants often affect price/output

decisions.


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Factors that Shape the Competitive

Environment Product Differentiation

R&D, innovation, and advertising are importantin many markets.

Production Methods Economies of scale can preclude small-firmsize.

Entry and Exit Conditions

Barriers to entry and exit can shelterincumbents from potential entrants.

Buyer Power Powerful buyers can limit seller power.


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Competitive Market Characteristics

Basic Features Many buyers and sellers.

Product homogeneity.

Free entry and exit. Perfect information.

Examples of Competitive Markets Agricultural commodities.

Prominent markets for intermediate goods andservices.

Unskilled labor market.


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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.

Role of Marginal Analysis

Set M = MR MC = 0 to maximize profits. MR=MC when profits are maximized.


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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 theamount of output the firm would bewilling to supply at any market price.

Marginal cost curve is the short-runsupply curve so long as P > AVC .


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Long-run Firm Supply

Marginal cost curve is the long-runsupply curve so long as P > ATC.

In long run, firm must cover all

necessary costs of production and earna normal profit.


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Competitive Market Supply Curve

Market Supply With a Fixed Number of Competitors

Supply is the sum of competitor output.

Market Supply With Entry and Exit

Entry results in more firms, increased output, a rightward

shift in the supply curve, and drives down prices andprofits.

Exit reduces the number of firms, decreases the quantityof output, shifts the supply curve leftward, and allowsprices and profits to rise for remaining competitors.


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Competitive Market Equilibrium

Balance of Supply and Demand Equilibrium is a balance of supply and

demand.

Normal Profit Equilibrium 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.


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Unit6 Chapter10 Hirschey Lecture