The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market.Four basic types of market structure are (1) Perfect competition: many buyers and sellers, none being able to influence prices. (2) Oligopoly: several large sellers who have some control over the prices. (3) Monopoly: single seller with considerable control over supply and prices. (4) Monopsony: single buyer with considerable control over demand and prices.

1. Market Structure

2. Market Structure
 The selling environment in which a firm produces and sells its product is called a
market structure.
 Defined by three characteristics:
 The numberof firms in the market
 The ease of entry and exit of firms
 The degree of product differentiation

3. Introduction
 Perfect competition, with an infinite number of firms, and monopoly, with
a single firm, are polar opposites.
Perfect Competition
A perfectly competitive market has the following
characteristics:
There are many buyers and sellers in the
market.The goods offered by the various
sellers are largely the same.
Firms can freely enter or exit the market.

4. Perfect Competition

5. Profit-Maximizing Level of Output
 The goal of the firm is to maximize profits.
 Profit is the difference between total revenue and total cost.
Revenue of a Competitive Firm
Total revenue for a firm is the selling price times the quantity sold.
TR = (P X Q)
Marginal revenue is the change in total revenue from an additional unit sold.
MR =∆TR/ ∆Q

6. Total, Average, And Marginal Revenue For A Competitive Firm
Quantity
(Q)
Price
(P)
Total Revenue
(TR=PxQ)
Average Revenue
(AR= TR/ Q)
Marginal Revenue
(MR= )
1 $6.00 $6.00 $6.00
2 $6.00 $12.00 $6.00 $6.00
3 $6.00 $18.00 $6.00 $6.00
4 $6.00 $24.00 $6.00 $6.00
5 $6.00 $30.00 $6.00 $6.00
6 $6.00 $36.00 $6.00 $6.00
7 $6.00 $42.00 $6.00 $6.00
8 $6.00 $48.00 $6.00 $6.00
QTR ∆∆ /

7. TC TR
0
TotalCost,Revenue
$385
350
315
280
245
210
175
140
105
70
35
Quantity1 2 3 4 5 6 7 8 9
Profit Determination Using Total Cost and Revenue Curves
Maximum profit =$81
$130
Loss
Loss
Profit
Profit =$45

8. Profit Maximization Using Total Revenue and Total Cost
 Profit is maximized where the vertical distance between total revenue
and total cost is greatest.
 At that output, MR (the slope of the total revenue curve) and MC (the
slope of the total cost curve) are equal.
Marginal revenue (MR) – the change in total revenue associated
with a change in quantity.
Marginal cost (MC) – the change in total cost associated with a
change in quantity.
*A firm maximizes profit when MC = MR.

9. Profit Maximization: Using MR and MC curves

10. Profit Maximization: The Numbers
Q P TR TC TR-TC MR MC ATC
0 $1 $0 $1.00 -$1.00 $1
1 $1 $1 $2.00 -$1.00 $1 $1.00 $2.00
2 $1 $2 $2.80 -$0.80 $1 $0.80 $1.40
3 $1 $3 $3.50 -$0.50 $1 $0.70 $1.17
4 $1 $4 $4.00 $0.00 $1 $0.50 $1.00
5 $1 $5 $4.50 $0.50 $1 $0.50 $0.90
6 $1 $6 $5.20 $0.80 $1 $0.70 $0.87
7 $1 $7 $6.00 $1.00 $1 $0.80 $0.86
8 $1 $8 $6.86 $1.14 $1 $0.86 $0.86
9 $1 $9 $7.86 $1.14 $1 $1.00 $0.87
10 $1 $10 $9.36 $0.64 $1 $1.50 $0.94
11 $1 $11 $12.00 -$1.00 $1 $2.64 $1.09
MR=MCMR=MC

11. The Marginal Cost Curve Is the Supply Curve
 The marginal cost curve is the firm's supply curve above the point where
price exceeds average variable cost.
 The MC curve tells the competitive firm how much it should produce at a
given price.

12. The Interaction of Firms and Markets
FirmFirm MarketMarketPricePrice
AndAnd
CostsCosts
PricePrice
qqFF QQMM
aa
bb
cc
dd
AA
BB
qq11qq22qq33qq44 QQ11 QQ22
MCMC
P=MRP=MR00
ATCATC
P=MRP=MR11
AVCAVC
SS11
SS22
DD00
$10$10
ATCATC
=$7=$7
10 units10 units

13. The Marginal-Cost Curve and the Firm’s Supply Decision...
Quantity0
Costs
and
Revenue
MC
ATC
AVC
Q1
P1
P2
Q2
This section of
the firm’s MC
curve is also
the firm’s
supply curve
(long-run).

14. Determining Profit and Loss
 Find output where MC = MR.
 The intersection of MC = MR (P) determines the quantity the firm will produce if
it wishes to maximize profits.
 Find profit per unit where MC = MR.
– Drop a line down from where MC
equals MR, and then to the ATC
curve.
– This is the profit per unit.
– Extend a line back to the vertical
axis to identify total profit.

15. (a) Profit case (b) Zero profit case (c) Loss case
Determining Profits Graphically
Quantity Quantity Quantity
Price
65
60
55
50
45
40
35
30
25
20
15
10
5
0
65
60
55
50
45
40
35
30
25
20
15
10
5
0
1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12
D
MC
A P = MR
B ATC
AVC
E
Profit
C
MC
ATC
AVC
MC
ATC
AVC
Loss
65
60
55
50
45
40
35
30
25
20
15
10
5
0
1 2 3 4 5 6 7 8 910 12
P = MR
P = MR
Price Price
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill

16. Loss Minimization
Average cost of a unit of outputAverage cost of a unit of output
RevenueRevenue
generated by agenerated by a
unit of outputunit of output
MarketMarket
priceprice
fallsfalls

17. MC
P = MR
2 4 6 8 Quantity
Price
60
50
40
30
20
10
0
ATC
AVC
Loss
A$17.80
The Shutdown Decision
If total revenue is more than total variable cost, the firm’s best strategy is to
temporarily produce at a loss

18. The Firm’s Long-Run Decision to Exit or Enter a Market
In the long-run, the firm exits if the revenue it would get
from producing is less than its total cost.
Exit if TR < TC
Exit if TR/Q < TC/Q
Exit if P < ATC
A firm will enter the industry if such an action would be
profitable.
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC