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Lecture 9 - EC 1 UCLA Dr Bresnock Lecture 9 This chapter...

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EC 1 UCLA Dr. Bresnock Lecture 9 This chapter begins our coverage of 4 market models, or market structures. First we will summarize the key characteristics of these models in Table 1 below. Then we will begin an in depth analysis of how each market structure selects its price and output. Table 1 Market Structure Characteristics Market Structure Characteristic Pure Competition Monopolistic Competition Oligopoly Monopoly # of Firms Very Large Many Few One Type of Product Standardized Differentiated Differentiated (D) or Standardized (S) Unique Control over Price None; “price takers” Some, but limited Mutual Interdependence to Considerable Considerable; “price maker” Conditions of Entry + Exit Very easy Relatively easy Significant “barriers to entry” Substantial “barriers to entry” Nonprice Competition, i.e. advertising, brand names, trademarks Product rather than brand use Considerable Great for Differentiated Trade-oriented for Standardized Mostly public service Examples
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EC 1 Lecture 9 Dr. Bresnock Price and Output Determination : Pure Competition Characteristics : 1. Large # of Independent Sellers 2. Standardized, or Homogeneous, Product – little ability for sellers to differentiate product; buyers indifferent between sellers 3. “Price Takers” not “Price Makers – sellers are “quantity adjusters”. **(see below) 4. No Barriers to Entry or Exit – no significant financial, technological, or legal obstacles 5. Only “Product” Advertising – i.e. California raisins, California cheese, “pork the other white meat”, “where’s the beef” Graph 1 Price Determination for Purely Competitive Firm Industry Firm S P D Q Millions of bushels INDUSTRY FIRM Some Terms : TR = Total Revenue = Price X Quantity AR = Average Revenue = Per Unit Revenue = TR Q MR = Marginal Revenue = Additional Revenue per an Additional Unit of Output = TR = TR 2 – TR 1 Q Q 2 – Q 1 2
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EC 1 Lecture 9 Dr. Bresnock Example : Assume P = $12 per unit. Price is “parametric”, or given. Table 2 Revenue Functions for a Purely Competitive Firm P Q TR = Q X Q MR = Δ TR/ Δ Q AR = TR/Q $12 0 0 $12 1 12 $12 $12 $12 2 24 $12 $12 $12 3 36 $12 $12 $12 4 48 $12 $12 $12 5 60 $12 $12 $12 6 72 $12 $12 $12 7 84 $12 $12 $12 8 96 $12 $12 P = MR = AR = D firm , MR = slope of TR Graph 2 Revenue Functions for the Purely Competitive Firm TR, slope = MR = P = AR P Note : The demand for the purely competitive firm in Graph 2 shows us that its demand is perfectly elastic at the price that was determined by the industry.
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