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BA_315_LN_6_MARKET_STRUCTURE_COMPETITION

BA_315_LN_6_MARKET_STRUCTURE_COMPETITION - MARKET STRUCTURE...

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1 MARKET STRUCTURE: COMPETITION Lecture Notes #6 BA 315: Economy, Industry, and Competitive Analysis Source: Schiller Chapter 6 Edited by Ali Emami Department of Finance Charles H. Lundquist College of Business University of Oregon
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2 Introduction This lecture looks at how supply decisions are made in the competitive market – a market where there are many small firms with no market power. It examines the characteristics of competitive markets and the forces that make them reach equilibrium. The following core questions should guide students as they review the chapter. 1. What are the unique characteristics of competitive markets? 2. How do competitive firms maximize profits? 3. How are the quantity and price of a good determined in competitive markets? Concepts you will learn Market Structure Competitive Profit-Maximizing Rule Competitive Firm Supply Competitive Market Market Supply Monopoly Equilibrium Price Market Power Barriers to Entry Production Decision Market Mechanism Total Revenue Efficiency Profit Opportunity Cost Marginal Cost (MC) Marginal Cost Pricing Internet links Industry classifications: North American Industry Classification System categories http://www.census.gov/epcd/naics/naicsfr7_tbl1.pdf
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3 Lecture Outline I. Market Structure (Figure 6.1) f Definition: Market Structure - The number and relative size of firms in an industry. A. Competitive Firm f Definition: Competitive Firm - A firm without market power, with no ability to alter the market price of the good it produces. f Example: A corn farmer is a price taker. f Note : A perfectly competitive firm is one whose output is so small in relation to market volume that its output decisions have no perceptible impact on price, i.e., the firm is a price taker. B. Competitive Market f Definition: Competitive Market - A market in which no buyer or seller has market power. f Example : High tech electronics, agricultural goods C. Monopoly f Definition: Monopoly - A firm that produces the entire market supply of a particular good or service. 1. Despite repeated legal and technological attacks, Microsoft still has a near-monopoly on computer operating systems. That position gives Microsoft the power to set market prices. 2. Coke and Pepsi have nearly 75 percent of the soft drink market between them, giving them the power to set prices. D. Market Power f Definition: Market Power - The ability to alter the market price of a good or service. E. Other forms of imperfect competition. 1. Duopoly - only 2 firms supply a particular product. 2. Oligopoly - a few large firms supply all or most of a particular product. 3. Monopolistic Competition - many firms supply essentially the same product but each has brand loyalty. Duopoly Monopoly Monopolisti competitio Oligopoly Imperfect competition Perfec competitio
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4 II. Perfect Competition A. No Market Power 1. Perfectly competitive firms are pretty much faceless. They have no brand image, no real market recognition.
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