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University of Texas at Austin
ECO 304L

1 Chapter 8 and first half of 9 Notes Econ Competition 1. Competition- more than just comeing against one or two other firms 2. Market Structure analysis- Oberving a few industry characteristics such as the number of firms and the level to barriers to entry, economists use this info to predict pricing and output behavior a. Four Factors that define the intensity of competition i. Number of Firms- are there many firms with no ability to set market price, or is it dominated by large firms such as wal-mart that can influence the price? ii. Nature of the product- Is it homogeneous like salt, or something like purses iii. Barrier to entry- Are there high start up and mainance costs iv. Extent to which individual firms can control prices-like pharmaceutical companies with new medicines, farmers and copper producers have no effect 3. Primary market structures a. Competition i. Many buyers and sellers ii. Homogeneous products iii. No barriers to market entry or exit iv. No long-run economic profits v. No control over price b. Monopolistic Competition i. Many buyers and seles ii. Differentiated products iii. No barriers to market entry or exit iv. No long run economic profits v. Some control over price 2 c. Oligopoly i. Fewer firms (auto industry) ii. Mutually interdependent decisions iii. Substantial barriers to market entry iv. Potential for long-run economic profits v. Shared Market power and considerable control over price d. Monompoly i. 1 firm ii. No close substitute for product iii. Insuperable barriers to entry iv. Potential for lon run economic profit v. Substantial market power and control over price 4. Competitive markets a. Theory of competition i. Many buyers ansellers ii. Homogeneous product iii. Buyers and sellers have all information to make decisions iv. Barreiers to entry or exit are insignificant in the long run b. Competitive firms are Price Takers-market prices are determined by market forces beyond the control of individual firms c. At complete competition an individual firm has a completely elastic supply demand curve i. They only can decide how much Q to make 5. Short Run Cometition decisions a. Marginal revenue- change in revenue that results from the sale of an added unit of product i. MR=ΔTR/ΔQ b. In a competitive market marginal revenue is simply the market price 3 c. Profit Maxamizing rule- A firm maximizes its profit by continuing to produce and sell output till marginal revenue equals marginal cost 6. Economic Profits a. Total profit-Opportunity cost 7. Normal Profits a. Normal Profit- 0 economic profit i. Everyone is happy, there are no pressures to leave or enter the industry 8. Loss minimization and plant shutdown a. Produceas much where Marginal revenue=marginal cost i. Even if your average total cost is higher than average revenue b. Shutdown point- When average variable cost is higher than average revenue 9. Long run Compeition Adjustments a. If econ profits more enter and bring it down to normal profits b. If econ losses, more leave and bring it up to normal profits 10. Competition and public interest a. Productive
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