Chapter 10

Competitive markets
What is competitive market?

 Large number of buyers and sellers

 Price takers
 Free entry and exit
Vital role of potential entrants

 Potential entrant- is an individual or firm posing a sufficiently credible threat of market

entry to affect the price output decisions of incumbent firms.
Factors that shape the competitive environment

 Product differentiation
-real or perceived differences in the quality of goods or services
 Production methods
-The processes and methods used to transform tangible inputs (raw materials, semi-
finished goods, subassemblies) and intangible inputs (ideas, information, knowledge) into
goods or services.
 Entry and exit conditions
-barrier to entry
-barrier to mobility
-barrier to exit
Profit maximization
The Firm’s Short Run Decision To Shut Down
The firms long-run decision to exit or enter a
market
Performance strategy and characteristics of
competitive markets
 Welfare economics- is the study of how the allocation of economic resources affects the
material well-being of the economy.
Consumer surplus

Is the amount that consumers are

willing to pay for a given good or
service minus the amount that
they are required to pay.
Producer surplus

Is the net benefit by producers from

production.
Deadweight loss problem
Is any economic loss suffered by consumers or producers
that occurs as a result of market imperfections or
government policies.
Structural problems

 Market power-refers to a company's relative ability to manipulate the price of an item in

the marketplace by manipulating the level of supply, demand or both.
 Market failure-is a situation where free markets fail to allocate resources efficiently.
 Failure by market structure- a situation when competitive markets malfunction because of
market power.
 Externalities-compensated benefits or cost tied to production or consumption.
Role for government

 Economic efficiency- least-cost production of desired goods and services.

 Economic regulation- government control of production or consumption.
 Social equity-fairness
 Consumer sovereignty- individual control over economic decisions.
Deadweight loss from taxes
Price controls
 Price ceiling-a costly mechanism for restraining excess demand.
 Price floor-A price floor is the lowest legal price a commodity can be sold at. Price floors
are used by the government to prevent prices from being too low
References

 Read more: http://www.businessdictionary.com/definition/production.html