Reading 15: The Firm & Market Structures

Question 1

What is the difference between a firm and a market?

Answer 1

A firm is one single company in a market. A market has different structures. These structures include:

• oligopoly
• monopoly
• monopolistic competition
• perfect competition

Question 2

What is a monopoly?

Answer 2

The monopoly is the firm that is also the market.

Characteristics include:

• profit maximizer
• PRICE MAKERS
• very HIGH BARRIERS TO ENTRY ()
• Price discrimination (they make price & change quality of products)
• only regulated by GOVT

Question 3

What is monopolistic competition?

Answer 3

Monopolistically Competitive Firm & Market:

Characteristics include:

• many sellers and buyers
• few barriers to entry
• competition only competitive edge is branding and marketing
• SELLERS have some control over price, not TOO MUCH

ex: Fast Food Chain (Mcdonalds, wendys, arbys, DQ)

Question 4

What is Oligopoly?

Answer 4

Oligopoly Firm & Market:

• few firms in market
• Barriers to entry are HIGH
• Competitors have to meet up to set prices
• little to no price differences
• products tend to be homogenous

ex: OIL + GAS, airplane tickets, automobile standards

Question 5

What is perfect competition?

Answer 5

Perfectly Competitive Firm & Market:

• huge # of buyers & sellers in the market
• homogenous products
• perfect information transfer between buyers & sellers
• sellers are PRICE TAKERS

EX: Agricultural Products (Bale of Hay is based off of how much the customer wants to pay for it….some areas it is 90 dollars and others is 30 dollars)

Question 6

For Each Market Structure please draw and explain:

1. ) PERFECT COMPETITION
   a. ) marginal revenue
   b. ) marginal cost
   c. ) economic profit
   d. ) elasticity of demand

LONG TERM PERFECT COMPETITION IMPLICATIONS

Answer 6

1. ) PERFECT COMPETITION
   a. ) marginal revenue- MR=AR=P=demand curve
   b. ) marginal cost- is a positively sloped line going from zero
   c. ) economic profit- economic profit is the difference between Demand Curve and ATC curve (SUPRANORMAL PROFIT)
   d. ) elasticity of demand- demand curve is perflectly elastic (D=price level)

Supranormal profits are temporary in the long-run. Looking at the Demand Curve for market, understand that an increase in competition would shift a supply curve to the right–> ***look at firm as an individual now….–> shifts the P=MR=Demand Curve DOWNWARD!!!!–> cuts into the SUPRANORMAL PROFITS WHICH YOU ARE LUCKY TO EVEN HAVE IN THE MARKET

P > ATC supranormal profit
P = ATC breakeven point
P < ATC loss in profit

Question 7

For Each Market Structure please draw and explain:

1. ) MONOPOLISTICALLY COMPETITIVE FIRM
   a. ) marginal revenue
   b. ) marginal cost
   c. ) economic profit
   d. ) elasticity of demand

Words of Wisdom: “The majority of the companies you patronize are in monopolistically competitive markets.”

Answer 7

All firms use same technique to maximize profit. MR=MC. BUT, calculating profits is necessary by looking at ATC. Demand for product sets the firms price.

With a monopoly, you make money where MR=MC at the demand curve above the MR Curve.

Economic Profit should be there in SHORT-RUN. In long-run, as more firms enter the market, there are more stores now that sell similar products. The demand curve for the firm shifts to the left. Profits are lost.

Is “Zero-Economic Profit Inevitable” in Long-Run?
For the most part, yes, but this is where value creation and proper advertising can maintain some sort of profits.

EX: STARBUCKS COFFEE, FAST FOOD RESTUARANTS

Question 8

For Each Market Structure please draw and explain:

1. ) MONOPOLY
   a. ) marginal revenue
   b. ) marginal cost
   c. ) economic profit
   d. ) elasticity of demand

Answer 8

Sustained curve similar to monopolistic competition curve (NO DIFFERENCE)

• sustained profit
• Elasticity of Demand- elastic x>1

EX: Google search engine

Question 9

For Each Market Structure please draw and explain:

1. ) OLIGOPOLY (KINKED DEMAND CURVE)
   a. ) marginal revenue
   b. ) marginal cost
   c. ) economic profit
   d. ) elasticity of demand

Answer 9

EX: Computer Market, Gaming Market (IBM, DELL, MICROSOFT, APPLE), (PS3, XBOX, WII), OPEC,

In order to succeed in Oligopoly (where products are identical, but differentiated), you must:

1. ) communicate with opponents to set prices
2. ) understand or ask yourself the question if you are losing market shares???
3. ) develop a competitive niche/look for a competitive niche so you don’t end up copying someone elses strategy
4. ) have the right business strategy/ pricing strategy that will beat an opponent for a quarter or so..(GAME THEORY)

Payoff Matrix: (20 MILLION PIE)
-Both charge high price (10/10) (cooperative eq)

• Both charge low price (7.5/7.5….LOSE 6 MIL) (PRISONERS DILEMMA)
• one charge high/one low (15 M/5M) (non-cooperative eq)

Barriers to Entry are HIGH bcse:

• Economies of Scale
• ownership of upstream/downstream production
• govt imposed barriers to entry

If you want more control in an Oligopoly, then you should possess:

1. ) more ability to produce units via Economies of Scale
2. ) ownership of key input (downstream/upstream)