Lesson 5 Markets
Lesson 5 Markets
Lesson 5 Markets
However, decisions made by each supplier (of a given product) in the market usually
matters because suppliers are not “too many” like the consumers.
Let’s see supplier’s decisions on price and output level, and how it depends on
market structure (supply-side).
8.1. PERFECTLY COMPETITIVE
MARKETS
Characteristics
Price Taking
Product Homogeneity
In real world, there is no way to judge absolutely whether a market is perfectly competitive or not.
• A market with many suppliers may be not competitive, while a market with a handful of
suppliers might be competitive. How?
8.2. PROFIT MAXIMIZATION
Do Firms Maximize Profit?
Non-profit organizations
Cooperatives: Association of businesses or people jointly owned and operated by members for
mutual benefit
Suppose a firm is losing money. Should it shut down and leave the industry?
So, firm’s supply curve is the portion of the marginal cost curve for which
MC > AVC
Remember that for a given price p, the firm chooses q such that MC(q) = p.
So given p, the level of q is fully determined.
price taking
A Competitive Firm’s
Short-run Supply Curve
Optimal LR Output if P = $30. Profit = 0 at this point. Below $30, the firm should shut down.
Long-run Competitive Equilibrium
(i) no incentive to enter/exit market, (ii) zero profit
supply = consumer demand
1 2
profit-maximizing level
Economic Rent
In the long run, in a competitive market, the producer surplus that a firm earns on the
output that it sells consists of the economic rent from all its scarce inputs.
• e.g., The firm with land close to river enjoys $10000 benefit because it doesn’t have to spend this
transportation costs.
However, after accounting for the opportunity cost associated with owning such
scarce inputs, the firm earns zero economic profit.
The firm is likely to have purchased the land close to river at a higher price (equal to $10000 in the scenario
of common information across all parties involved).
8.8. INDUSTRY’S LONG-RUN
SUPPLY CURVE
Long-run Supply in a Constant-cost Industry
Long-run Supply in an Increasing-cost Industry
Effect of Output Tax
on Firm’s Output
Price Takers – Can’t decide price • Firm in the market can decide both
price and quantity (to different extents,
depending on exact structure)