Entry results in more firms, increased output,
a rightward shift in the supply curve, and drives down prices and profits. Exit reduces the number of firms, decreases the quantity of output, shifts the supply curve leftward, and allows prices and profits to rise for remaining competitors.
MR=P. P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.
Problems 1
Florida is the biggest sugar-producing state, but Michigan and Minnesota are home to thousands of sugar beet growers. Sugar prices in the United States average about 20¢ per pound, or more than double the world-wide average of less than 10¢ per pound given import quotas that restrict imports to about 15% of the U.S. market. Still, the industry is perfectly competitive for U.S. growers who take the market price of 20¢ as fixed. Thus, P = MR = 20¢ in the U.S. sugar market. Assume that a typical sugar grower has fixed costs of $30,000 per year. Total variable cost (TVC), total cost (TC), and marginal cost (MC) relations are:
Chapter 7 KEY CONCEPTS
market structure market potential entrant product differentiation competitive markets barrier to entry barrier to mobility barrier to exit perfect competition price takers
Problems 2
The retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $1.80 per gallon and total cost (TC) and marginal cost (MC) relations are: TC = $40,000 + $1.64Q + $0.0000001Q2 MC = MTC/MQ = $1.64 + $0.0000002Q and Q is gallons of gasoline. Total costs include a normal profit.
Role of Marginal Analysis
Set Mπ = MR – MC = 0 to maximize profits. MR=MC when profits are maximized.
Marginal Cost and Firm Supply
Short-run Firm Supply
Competitive MarketsCFra bibliotekapter 7
Chapter 7 OVERVIEW


Competitive Environment Factors That Shape the Competitive Environment Competitive Market Characteristics Profit Maximization in Competitive Markets Marginal Cost and Firm Supply Competitive Market Supply Curve Competitive Market Equilibrium

normal profit economic profit economic losses marginal analysis competitive firm short-run supply curve competitive firm long-run supply curve.
Competitive Market Equilibrium
Balance of Supply and Demand
Equilibrium is a balance of supply and
demand.
Normal Profit Equilibrium
With a horizontal market demand curve,
Competitive market price (P) is shown as a
horizontal line because P=MR. Firm’s marginal-cost curve shows the amount of output the firm would be willing to supply at any market price. Marginal cost curve is the short-run supply curve so long as P > AVC .
Competitive Market Characteristics
Basic Features
Many buyers and sellers. Product homogeneity. Free entry and exit.
Perfect information.
Examples of Competitive Markets
Competitive Environment
What is Market Structure?
Market structure is the competitive environment. Number of buyers and sellers. Potential entrants. Barriers to entry and exit, etc.
Competitive Market Supply Curve
Entry and exit in competitive markets will continue until P=AR=MR=MC=ATC. The long-run competitive market supply curve is a horizontal line equal to the market price. Because firms can more easily enter or exit in the long-run, long-run supply curves tend to be more elastic than shortrun supply curves.
Vital Role of Potential Entrants
Competition comes from actual and potential
competitors. Potential entrants often affect price/output decisions.
Factors that Shape the Competitive Environment
Long-run Firm Supply
Marginal cost curve is the long-run supply
curve so long as P > ATC. In long run, firm must cover all necessary costs of production and earn a normal profit.
Competitive Market Supply Curve
Market Supply With a Fixed Number of Competitors
Supply is the sum of competitor output.
Market Supply With Entry and Exit
Entry and Exit Conditions
Barriers to entry and exit can shelter incumbents
from potential entrants.
Buyer Power
Powerful buyers can limit seller power.
Agricultural commodities. Prominent markets for intermediate goods
and services. Unskilled labor market.