19+monopolyHandout - Market Structure u Competitive Market...

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1 Market Structure u Competitive Market u everybody small u homogeneous product u no barriers to entry u Monopoly u single producer of a good u no close substitutes u barriers to entry Causes of Market Power u competition - large number of firms can be supported at minimum efficient scale ATC Firm q Market demand very large relative to efficient firm quantity Q = (# firms) · q u economies of scale - cost conditions u compare market demand to size of efficient production Q P Market D Market Q Competitive S (LR) u natural monopoly - ATC is declining and minimum efficient scale bigger than the market Market demand small relative to efficient firm quantity Causes of Market Power u economies of scale - cost conditions u compare market demand to size of efficient production u monopoly - demand supports only one large firm Firm q (efficient) Q P Market D
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2 Causes of Market Power u barriers to competition u restrictions reduce the number of competitors below the number that would survive based on efficiency or cost conditions patents copyrights u economies of scale - cost conditions u compare market demand to size of efficient production u demand and supply determine market price u firm’s demand is horizontal at the market price u firm is price-taker Firm Demand u competitive market Firm Q Market Q P D S D P Market Price Competitive Supply Market Demand Competitive Firm’s Demand Curve Firm Demand u monopolist faces the market demand curve u market and firm demand same u monopolist chooses p,q combination on demand curve u goal - profit maximization u monopolist is price-setter Firm Q Market Q P D P D Market Demand Monopolist’s Demand Curve
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3 Output Quantity Market Price ($) 0 250 2 225 4 200 6 175 8 150 10 125 12 100 14 75 16 50 18 25 20 0 250 0 50 100 150 200 0 2 4 6 8 10 12 14 16 18 20 Costs ($) D Output Quantity u monopolist faces the market demand curve u lower price to sell more output Firm Demand Quantity Market Price ($) Total Revenue ($) Marginal Revenue ($) 0 250 0 2 225 450 4 200 800 6 175 1050 8 150 1200 125 1250 100 1200 75 1050 50 800 25 450 0 0 225 175 125 75 25 -25 -75 -125 -175 -225 0 2 4 6 8 0 500 1000 1500 2000 TR Output Quantity 250 0 100 150 200 0 2 4 6 8 D Output Quantity Total Revenue u
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19+monopolyHandout - Market Structure u Competitive Market...

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