HUTECH Institute of International Education Competitive markets TOPIC 7 COMPETITIVE MARKETS 7 1 DEFINITION OF COMPETITIVE MARKET 7 2 PROFIT MAXIMIZATION AND THE COMPETITIVE’S FIRM SUPPLY CURVE 7 3 THE[.]
TOPIC COMPETITIVE MARKETS 7.1 DEFINITION OF COMPETITIVE MARKET 7.2 PROFIT MAXIMIZATION AND THE COMPETITIVE’S FIRM SUPPLY CURVE 7.3 THE SUPPLY CURVE IN COMPETITIVE MARKET HUTECH Institute of International Education Competitive markets MARKET STRUCTURE Market structure Perfect competition Imperfect competition Monopolistic competition RMIT University Vietnam Monopoly Oligopoly Price and Markets Competitive market ▪ Definition of Competitive market: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker ▪ A perfectly competitive market, has characteristics: Many buyers and many sellers in the market The goods offered for sale are largely the same Firms can freely enter or exit the market HUTECH Institute of International Education Competitive markets Competitive market There are many buyers and many sellers in the market - Each buyer and seller is a price taker ▪ The individual firm sells a very small share of the total market output and, therefore, cannot influence market price ▪ The individual consumer buys too small a share of industry output to have any impact on market price ▪ Each buyer and seller takes market price as given HUTECH Institute of International Education Competitive markets Competitive market The goods offered by the various sellers are largely the same - Product Homogeneity ▪ The products of all firms are perfect substitutes ▪ Product quality is relatively similar as well as other product characteristics HUTECH Institute of International Education Competitive markets Competitive market Firms can freely enter or exit the market - Free entry and exit ▪ When there are no special costs that make it difficult for a firm to enter (or exit) an industry ▪ Buyers can easily switch from one supplier to another ▪ Suppliers can easily enter or exit a market HUTECH Institute of International Education Competitive markets The Revenue of a Competitive Firm ▪ Total revenue (TR) ▪ Average revenue (AR) For all types of firms, AR equals the price of the good ▪ Marginal revenue (MR): The change in TR from selling one more unit TR = P x Q TR =P AR = Q ∆TR MR = ∆Q MR = P is only true for firms in competitive markets HUTECH Institute of International Education Competitive markets ACTIVE LEARNING Calculating TR, AR, MR Fill in the empty spaces of the table Q P TR $10 n/a $10 $10 $10 $10 $10 AR MR $40 $10 $10 HUTECH Institute of International Education $50 Competitive markets ACTIVE LEARNING Answers Fill in the empty spaces of the table Q P TR = P x Q $10 $0 AR = TR Q MR = ∆TR ∆Q n/a $10 $10 $10 $10 Notice that $20 $10 MR = P $10 $30 $10 $10 $10 $10 $10 $10 $40 $10 $10 $10 HUTECH Institute of International Education $50 $10 Competitive markets Profit Maximization ▪ What Q maximizes the firm’s profit? ▪ To find the answer, “think at the margin.” If increase Q by one unit, revenue rises by MR, cost rises by MC ▪ If MR > MC, then increase Q to raise profit ▪ If MR < MC, then reduce Q to raise profit ∆TR MR = ∆Q HUTECH Institute of International Education ∆TC MC = ∆Q Competitive markets ... sellers in the market The goods offered for sale are largely the same Firms can freely enter or exit the market HUTECH Institute of International Education Competitive markets Competitive market There... output to have any impact on market price ▪ Each buyer and seller takes market price as given HUTECH Institute of International Education Competitive markets Competitive market The goods offered.. .MARKET STRUCTURE Market structure Perfect competition Imperfect competition Monopolistic competition RMIT University Vietnam Monopoly Oligopoly Price and Markets Competitive market ▪