KINH TẾ VI MÔ Chapter 6 market structure

CHAPTER 6

MARKET STRUCTURE

Content

Perfect competition
Monopoly
Monopolistic competition
Oligopoly


MARKET STRUCTURE
1. Market
- Where all activities in economy are price-led

MARKET STRUCTURE
MARKET
STRUCTURE

PERFECT
COMPETITION

IMPERFECT
COMPETITION

MONOPOLISTIC
COMPETITION

MONOPOLY

OLIGPOLY


MARKET STRUCTURE
Types of market
Number of suppliers

Products

Entry barrier

Market power

Non-price
competition

Perfect
competition

Monopolistic
competition

Oligopoly

Monopoly

Unlimited

Several

Few

One

Identical

Different

Identical/
Different

Unique

High

Very
high

Strong

Very
strong

None

Low

None

Weak

None

Little

Much

None

I. PERFECT COMPETITION
1.
-

Definition
A type of market where there are unlimited
suppliers and their products are identical

- Examples: Agricultural products ....


PERFECT COMPETITION
2. Characteristics
-

Suppliers are price-taker
No entry barrier
No market power
Symmetric information
No non-price competition (no advertisement)
Not necessary to choose supplier

PERFECT COMPETITION
3. Demand and marginal
revenue curves
-

-

-

Demand curve: parallel
with horizontal axis
Marginal curve: coinciding
with demand curve

P

P =MR = AR
P*

→ MR = P = AR

Q


PERFECT COMPETITION
4. Maximizing profit
ΠMAX: MR=MC

P

MC

In perfect competition: MR = P

⇒

ΠMAX in perfect competition:

P=MR

P*

P=MC
Q*

PERFECT COMPETITION
5. Break-even, shut down point

Π = TR – TC = Q (P - ATC)
P> ATCmin → Π > 0 → profit
P= ATCmin → Π = 0 → break-even point
P< ATCmin → Π < 0 → loss
AVCmin< P < ATCmin → continue producing
P < AVCmin → shut down

Q


PERFECT COMPETITION

5. Break-even, shut
down point

P

P> ATCmin
TR = P*AQ*O
TC = OCBQ*
→ Π = P*ABC

MC
ATC

Πmax
A
P*

P=MR
C

B

O
Q*

Q

PERFECT COMPETITION
5. Break-even, shut
down point

P

MC

P= ATCmin
TR = P*AQ*O
TC = P*AQ*O
⇒ Π = 0
⇒ Q*: break-even point

A

ATC

P=MR

P*

O
Q*

Q


PERFECT COMPETITION
5. Break-even, shut
down point
P< ATCmin

P
MC
ATC

-Π

B

C

TR = P*AQ*O
TC = OCBQ*
→ - Π = P*ABC

P=MR

P*
A

O
Q*

Q

PERFECT COMPETITION
5. Break-even, shut
down point
AVCmin < P < ATCmin

P

MC
ATC
B

C

TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - Π = P*ABC
* Stop: Lose FC = BCEF
⇒ FC > - Π
⇒ Continue producing

P*

AVC
A
P=MR

E

F

Q*

Q


PERFECT COMPETITION
5. Break-even, shut down

point
P < AVCmin
TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - Π = P*ABC
* Stop: Lose FC = BCEF
FC < - Π
→ Stop producing
(shut down point)

P
MC
B

ATC

C

AVC
F

E
P*

A

P=MR

O
Q*

Q

PERFECT COMPETITION
6. Supply curve

P

MC

- Coinciding with MC,
but from AVCmin

P=MR

P*

AVC

Q*

Q


PERFECT COMPETITION
7. Producer’s surplus
(PS)
- The area below price
line and above marginal
cost curve

P
MC

P=MR
P*

PS = TR – VC
= Π + FC

PS

Q*

EXERCISE
Total cost function of a perfect competition firm is:

TC = Q2 + Q + 100
a. At P = 27$, state out Q* and ΠMAX
b. State out the break-even point of this firm
c. At P = 9$, should this firm close its business?
d. Show this firm’s supply curve

Q


MONOPOLY
1.
-

-

Definition
A type of market where there is only one supplier
and the product is unique
Examples:

2. Reasons of monopoly
-

Economy of scales
Stipulated by government
Owning patterns, license….
Monopoly in inputs
Monopoly in location

MONOPOLY
3. Demand and marginal
revenue curves
-

Demand curve: downward
sloping and relatively steep

-

Marginal revenue curve:
downward sloping, is twice
as steep as the slope of the
demand curve (and the

same intercept)
P = -aQ + b
MR = -2aQ + b

P

MR

D
Q


MONOPOLY
4. Maximizing
profit

P

Πmax: MR=MC

ΠMAX: MR=MC

P*m

MC
ATC
ΠMAX

MR

D

Q*m

Q

MONOPOLY
P

Πmax: MR=MC

P*m>>P*c
Q*m<P*m

MC

P*c

MR
Q*m

Q*c

D
Q


Dead weight loss
Perfect competition

- CS: a+b+c
- PS: d+e
Monopoly:
- CS: a (lose b+c)
- PS: e+b
(gain b, lose d)

Πmax: MR=MC

P

P*m>>P*c
Q*m<a

a
P*m

MC
b

b

c

P*c

d
e

→ d+c: Dead weight loss
(DWL)

MR
Q*m

D

Q*c

Q

MONOPOLY
5. Supply curve of a monopolist
P changes, Q is constant
P

P is constant, Q changes
P

MC

P*1

MC
P*

P*2

D2

MR2

D2
MR1
Q*

MR2

D1

D1

MR1
Q

Q*1

Q*2


MONOPOLY
5. Supply curve of a monopolist
-

-

-

No 1:1 relationship between price and
quantity

→ No functional relationship between price
and quantity
→ No supply curve in monopoly

MONOPOLY
6. Market power
-

Found in 1934 by Abba Lerner

L =

-

P − MC
P

(0 ≤ L ≤ 1)
In perfect competition: P = MC → L = 0
The higher value of L is, the stronger market power a firm
can gain


EXERCISE
A monopolist is facing with a demand curve:
P = 18 – 2Q
and total cost function: TC = Q2
a. State out P*, Q* and Π*MAX
b. Government imposes 3$/ unit tax on producer. What is
new P**, Q** and Π**MAX

c. Government imposes a fixed tax amount of 10$ on
producer. Compare P***, Q*** and Π***MAX with P*, Q*
and Π*MAX in question a