This document discusses market structure and equilibrium under conditions of perfect competition and monopoly. It defines key concepts such as demand, supply, marginal revenue, marginal cost, and market equilibrium. Perfect competition is characterized by many small firms that are price takers, while a monopoly has a single seller that is a price setter. The examples show how to calculate market equilibrium price and quantity for competitive and monopoly markets given demand and supply/cost functions.
2. Market Efficiency
• Decision makers in a market behave
rationally and have full access to all
relevant behavior.
• Consumer and producer surplus is
maximized
3. Determinants of Market Structure
• Number and size of buyers, sellers, and
potential entrants,
• Degree of product differentiation
• Amount and cost information about product
price and quality, and
• Conditions for entry into and exit from a
market
4. Market Equilibrium
Perfect Competition
• Supply forces (producers)
and demand forces
(consumers) seek a
balance
• Price below perceived
value increases demand
• Price above ATC
provides pure profit, an
incentive to increase
supply
Supply
curve
Demand
curve
Q
P
Pe
5. Individual Firm’s Demand
and MR Curve
Q
P
Pe
Highly elastic demand
One firm’s change in Q has little effect on price
∆Q
∆P
6. Market Equilibrium
Perfect Competition
• Price above ATC
provides pure profit,
an incentive to
increase output
• Pure profit equals
(P1 x Q1) – (P2 x Q2)
P1
MC
ATC
Price (P)
P2
Q2 Q1
Individual Firm
7. Market Equilibrium
Perfect Competition
• All firms are price takers
• Market price (P1) equals
marginal revenue (MR) and
average revenue (AR)
• Optimal level of output is
where MR = MC = P1
• In long-run P will go to P2
where pure profit is
eliminated
P1
MC
ATC
Price (P)
P2
Q2 Q1
Individual Firm
8. Market Supply Curve
Summation of supply curves for individual firms
Joe’s sawmill
Pete’s sawmill
Tracy’s sawmill
Janet’s sawmill
Market supply curve
Q
P
Sum vertically
+
+
+
=
Qm
Qj
Qt
Qp
Qj
Demand
Pm (same P for all firms and market)
9. Perfect Competition - Example
• Given supply and demand functions,
Qs = 30 + 55 P
Qd = 230 – 45 P
• Determine marginal revenue, MR, i.e. Pe, from supply and
demand curves for total market. Calculate Pe from market
supply equals demand equilibrium condition,
Qs = Qd
30 + 55 P = 230 – 45 P
100 P = 200
P = 2 = MR
• Use P to get equilibrium quantity, Qe
Qe = 230 – 45 x 2 = 230 –90 = 140
10. Apply Market Price to Individual
Firm – “Pete’s Sawmill”
P = $2 from market equilibrium
Determine quantity Pete should produce
from Pete’s marginal cost (MC) curve,
which is,
Qs = 5 + 5.8 P
= 5 + 5.8 x 2
= 16.6
11. Market Equilibrium
Monopoly
• Only one producer
– Producer is a price “setter”, not a price
taker
• Demand curve restricts ability to set price
– Demand curve determines marginal
revenue (MR)
• Only way to change quantity sold is to
change market price
• Marginal revenue (MR) is not constant
• What forces lead to a monopoly
13. Marginal Revenue Curve
• TR = P x Q
• Demand curve – P = a – bQ
• TR = (a – bQ ) x Q
= aQ – bQ2
• MR = dTR/dQ = a – 2b Q
• Same intercept and 2x slope of demand
curve
14. Market Equilibrium
Monopoly compared to competitive equilibrium
Q
P
Monopolists
MC curve
Market
demand curve
Monopolists
MR curve
Qm
Pm
Qc
Pc
m – monopoly equilibrium
c – competitive equilibrium
16. Monopoly – Example
Given, same supply and demand curves as in
competitive example,
Qd = 230 – 45 P (given), or
P = 5.11 – 1/45 Q
Qs = 30 + 55 P (given), or
P = 0.545 + 1/55 Q
Determine marginal revenue curve:
Revenue = P x Q
= Q (5.11 – 0.022 Q)
= 5.11 Q – 0.022 Q2
MR = 5.11 – 0.044 Q
17. Monopoly – Example, cont.
Equate MC and MR to determine Q:
5.11 – 0.044 Q = 0.545 + 0.018 Q
4.57 = 0.062 Q
Q = 74
Substitute Q into demand curve to get P,
P = 5.11 – 0.022 x 74 = 3.48
Compare the solutions for the two types of markets,
Competition: P = 2.00, Q = 130
Monopoly: P = 3.48, Q = 74
18. Monopsony
• One buyer and many sellers
• Common in forest products markets
– Bulky and heavy commodity
– High transportation cost
– Limits haul distance
• How can sellers gain market power?