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Chapter 11a - Chapter 11:Managerial Decisions in...

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1 Chapter 11:Managerial Decisions in Competitive Markets Market structure The characteristics of a market that influence how trading takes place How many buyers and sellers? Products: standardized or significantly different? Barriers to entry/exit ? Types of markets Perfect competition Monopoly Monopolistic competition Oligopoly
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2 Market structure and managers What is a Market? A market is any arrangement through which buyers & sellers exchange goods & services. Markets reduce transaction costs. Costs of making a transaction other than the price of the good or service. Market characteristics that determine the economic environment in which a firm operates. Number & size of firms in market Degree of product differentiation Likelihood of new firms entering market
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3 Market structure and managers Perfect Competition Large number of relatively small firms Undifferentiated product No barriers to entry Monopoly Single firm Produces product with no close substitutes Protected by a barrier to entry Monopolistic Competition Large number of relatively small firms Differentiated products No barriers to entry Oligopoly Few firms produce all or most of market output Profits are interdependent Actions by any one firm will affect sales & profits of the other firms
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4 Perfect Competition: price taking firm 1. All firm in the market are producing a Homogenous Product. 1. Each Buyers and Seller Is Small Relative to the Total market. Or produces only a very small portion of total market or industry output. 1. A large number of independent firms produce the product. The independence of the firm rules out joint actions designed to restraint output and raises prices. 4. There Are No Artificial Barriers to Entry into or Exit from the Market.
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5 Demand for a Competitive Price-Taker Demand curve is horizontal at price determined by intersection of market demand & supply Perfectly elastic Marginal revenue equals price
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