Market Structure & Pricing

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Market Structure & Pricing by Mind Map: Market Structure & Pricing

1. Perfect competition - Ch. 12

1.1. Introduction

1.1.1. market structure refers to the important features of the market # firms ease of entry & exit forms of competition

1.1.2. perfect competition market struture characteristics many buyers & sellers sell a commodity product buyers & sellers fully informed about price & availability easy to enter & exit market commodity a standardized product that does not differ across producers

1.1.3. demand under perfect competition

1.2. Short-run Profit Maximization

1.2.1. Profit = total revenue - total cost

1.2.2. Golden rule of profit maximization produce where MR = MC

1.2.3. economic profit in short-run average revenue = total revenue divided by quantity equals market price market price = MR = AR

1.3. Minimizing Short-run Losses

1.3.1. fixed cost & minimizing  losses fixed cost is a sunk cost whether firm produces or shuts down if TR > VC - should produce

1.3.2. marginal revenue = marginal cost produce as long as price > AVC

1.3.3. shutting down in the short-run shut down when AVC > price at all levels of output

1.4. Firm & Industry Supply Curves

1.4.1. Firm's SR supply curve shows how much a firm supplies at each price

1.4.2. Industry SR supply curve At prices < p, no output supplied

1.4.3. Firm supply & equilibrium

1.5. Long-run

1.5.1. Zero economic profit

1.6. Long-run Industry Supply Curve

1.6.1. constant cost industries LR industry supply curve is horizontal

1.6.2. increasing cost industries LR industry supply curve slopes upward

1.7. Efficiency

1.7.1. Productive efficiency situation where production uses the least-cost combination of inputs minimum point on LRAC curve

1.7.2. Allocative efficiency occurs when firms produce the output consumers value most. output where MR=MC

1.7.3. What's so perfect? Producer surplus in short-run = TR - VC Social Welfare overall well-being of people in an economy maximized when MC = Marginal benefit to consumers

2. Monopolistic competition - Ch. 13

2.1. Structure with many firms selling products that are

2.1.1. substitutes but different enough that each firm's demand curve slopes downward

2.1.2. firm entry is relatively easy

2.2. Product differentiation

2.2.1. Physical differences

2.2.2. Location

2.2.3. Services

2.2.4. Product image

2.3. Short-run Profit Maximization or Loss Minimization

2.3.1. MR = MC

2.3.2. No supply curve

2.3.3. As long as P > AVC, keep producing

2.3.4. If P < AVC, shut down

2.4. Zero Economic Profit in the Long-run

2.4.1. happens because market entry is easy

2.5. Monopolistic Competition vs Perfect Competition

2.5.1. In long-run both earn zero economic profit

2.5.2. Monopolistic Comp charges more & makes less than Pure Comp

2.5.3. Monopolistic comp spend more to differentiate their products

3. Oligopoly - Ch. 14

3.1. A market structure characterized by so few firms that each behaves interdependently

3.1.1. interdependent refers to no one buyer has control over price

3.2. Varieties

3.2.1. Undifferentiated sell a commodity product does not differ across suppliers steel oil

3.2.2. Differentiated sells products that differ across suppliers CR-V vs. Rav-4

3.3. Economies of Scale

3.3.1. most important barrier to entry

3.3.2. cars sold between prices a & b will be at a loss

3.4. High cost of Entry

3.5. Crowding out the competition

3.6. 3 Approaches

3.6.1. Collusion & Cartels Cartel a group of firms that agree to coordinate pricing & production to reap monopoly profit Collusion an agreement among firms to increase profit by To maximize profit output must be allocated so that the MC for the  final unit produced by each firm is identical # firms in the cartel more firms make it harder to come to agreement New entry can't prevent new entry or force new entrants to join Cheating by pricing just below agreed price, a member can increase sales & profits

3.6.2. Price Leadership Price leader firm whose price is matched by other firms initiates any market price changes

3.6.3. Game Theory analyzes ogopolistic behavior as a series of strategic moves and countermoves by rival firms

3.7. Oligopoly vs Perfect Competition(PC)

3.7.1. Price is usually higher under Oligopoly

3.7.2. higher profits under oligopoly

3.7.3. If firms collude lower output than PC higher price than PC

4. Monopoly - Ch. 15

4.1. Barriers to Entry

4.1.1. Legal restrictions Patent grants the holder the exclusive right to sell a product for 20 years License & other entry restrictions Federal State Market power

4.1.2. Economies of scale illustrated by downward sloping LRAC Natural monopoly emerges from economies of scale

4.1.3. Control of essential resources when a company has control over some resource critical to production Examples Alcoa & aluminum industry De Beers & diamond industry

4.2. Revenue for a Monopolist

4.2.1. Monopolist demand = Market demand

4.2.2. Demand, average revenue, marginal revenue demand = average revenue average revenue = TR / quantity marginal revenue change in TR from selling 1 more unit

4.2.3. The gain & loss from selling 1 more unit

4.2.4. Revenue curves

4.3. Costs & Profit Maximization

4.3.1. Price maker firm which has the ability to set prices

4.3.2. Profit maximization 2 ways: TR - TC MR = MC Graphically:

4.3.3. Short-run losses & Shut-down decision If Price > AVC - produce If Price < AVC - shut-down

4.3.4. Long-run profit maximization happens if monopoly is protected from competition by high barriers that block new entry

4.4. Monopoly & the Allocation of Resources

4.4.1. Price & Output - Perfect Competition where Supply = Demand

4.4.2. Price & Output - Monopoly Price where output level intersects the demand curve Output where MR = MC

4.4.3. Allocative & distributive effects allocative efficiency Monopoly inefficient because of higher prices & lower output Deadweight loss net loss to society when a firm with market power restricts output & increases price

4.5. Price Discrimination

4.5.1. increasing profit by charging different groups of consumers different prices for same product

4.5.2. conditions for discrimination demand curve slopes downward 2 criteria: 2 or more groups of consumers each group with different Ed firm must be able to charge each group different price for same good at little cost firm must be able to prevent those buying at lower price from re-selling.

4.5.3. examples of price discrimination Airline tickets discount if buy well in advance Printers pages minute iPads gigabytes of memory