CHAPTER 6: MARKET STRUCTURE

1. Market and market classification

1.1. Definition

Market - A group of buyers and sellers of a particular good or service

1.2. Classification
Depending on :

➢ Number of buyers and sellers

➢ Degree of differentiation of products
➢ Market power ( the ability to adjust the price )
➢ Entry barriers - The ease or difficulty of entering and exiting the market
❖ Perfect competition
❖ Imperfect competition (Monopolistic competition; Oligopoly)
❖ Monopoly ( no more competition )
2. Perfect competition

2.1. Characteristics

Price taker: take the price as given , accept the price of market ( have no power to adjust or manipulate it )

2.2. The firm’s D curve and MR curve

2.2.1. The firm’s D curve:

The firm is a Price-taker

Firm’s demand curve is horizontal at market price
The firm is a price-taker, so its demand curve is horizontal, which means that the price of
the firm’s output is the same regardless of the quantity that the firm decides to produce.

This is because consumers have perfectly elastic demand towards the perfectly
competitive firm.

When good A is sold at the equilibrium point with the price PMK, if one firm sells good A at a
higher price, consumers change firms immediately. Likewise, when one firm sells good A at
a lower price, consumers become skeptical about the product and the firm loses its
motivation of producing good A.

2.2.1. The firm’s MR curve:

MC - Marginal cost : the change in total production cost that comes from making or
producing one additional unit

MR – Marginal revenue: the change in total revenue from an additional unit sold

AR – Average revenue : total revenue divided by the quantity sold

AR = TR/q = P.q/q = P

Sell at market price

E.g.

P=12

1 cup = 12

2 cup = 24

=> MR = 12 =P
Calculating TR, AR, MR
a) Perfect competition
- Sellers : great many
- Product : identical
- Market power : None
- Market barrier : None
b) Price doubling

c)
2.3. Producing in SR

• The number of firms in the market is fixed in the short run

• A firm produces at the output that maximizes the profit or minimizes the loss

❖ 2.3.1. The firm’s supply decision

π = TR - TC
To maximize profit:

MR = MC = P
The firm can/ cannot still compensate for the variable cost it pays for producing goods
 ❖ 2.3.2. The firm’s supply curve :

Perfect competition market => sellers have no impact on the price

=> instead : D and S curve

The MC curve determines the firm’s Q at any price.

In order to generate profit, Firm should produces at the point where:

MR = MC = P ≥ AVCmin

=> The firm’s SR supply curve is the portion of its MC curve above AVC.
Exercise
 ❖ 2.3.3. Market Supply Curve

MC( đường cung doanh nghiệp ) obey the law of supply

Exercise
 ❖ 2.3.4. Producer surplus (PS)
The total amount that a producer benefits from producing and selling a quantity of a good at
the market price

To a perfectly competitive firm, Producer surplus is the amount

a seller is paid for a good
minus
the seller’s ( marginal ) cost of providing it.

Profit is a closely-related concept to producer surplus; however, they differ slightly.

Economic Profit takes revenues and subtracts both fixed and variable costs.
Producer surplus, on the other hand, only takes off marginal ( variable ) costs.

To a perfectly competitive market, producer surplus is the area

below the price line and above the supply curve. ( contrast to CS )
 ❖ 2.3.5. Total surplus ( Society surplus ) - thặng dư xã hội

Total surplus—the sum of Consumer & Producer surplus —

the area between the Supply & Demand curve up to the Equilibrium quantity

❖ 2.3.6. Deadweight loss ( DWL )

The loss in social surplus that occurs when the economy produces at an inefficient quantity is called
deadweight loss. In a very real sense, it is like money thrown away that benefits no one.

When set price floor

 When set price ceiling

When impose Tax

TS = CS + PS - Tax

Exercise
2.4. Producing in LR

In the LR, the number of firms can change due to entry & exit.

★ If existing firms earn positive economic profit,

• new firms enter => market supply shifts right.
• P falls
=> reducing profits and slowing entry.

★ If existing firms incur losses

• some firms exit => market supply shifts left.
• P rises
=> reducing remaining firms’ losses.

❖ To maximize profit:

❖ The firm’s supply curve

❖
❖ Long-run equilibrium:

The process of entry or exit is complete—remaining firms earn zero economic profit