AED Economics 200
Principles of Food and Resource Economics
Winter, 2003

5.  Market Structure -
Perfect Competition and Monopoly Markets: The Extremes

1. Assumptions
2. Large number of buyers and sellers
3. Homogeneous product
4. Perfect information about current and future prices
5. No barriers to entry or exit

Short Run Industry Supply Curve - summation of firms' supply curves

Market equilibrium - intersection of demand and supply

Effects of supply and/or demand shifts on market equilibrium

Market participants are price takers

Market Demand Price Elasticity vs. Firm Demand Price Elasticity

Return Above Variable Cost = Return to fixed resources = Economic rent

Producer Surplus

Long Run Competitive Equilibrium

1. Econ. profit is zero
2. P = MC = SRATC = LRATC

Constant Cost Industry
Increasing Cost Industry
Decreasing Cost Industry

What Will Change in Price of Another Product Do to Price?

Will Firms Advertise in Perfectly Competitive Market?

What Will Technological Change Do to Prices?

Economic Surplus (Societal Welfare) under Perfect Competition is maximized

Power of the market (Forster)

- enables people to cooperate peacefully while pursuing their self interest.  Noble goals (altruism, selflessness, etc.) are not needed.  A workable system evolves that depends on the less laudable, but more realistic side of human nature (greed).

-transmits information

-provides incentives
     to adopt new methods of production
     to use resources frugally
     to produce products that are highly valued by consumers

- determines distribution of income

1. one seller
2. unique product
3. high barriers to entry

1. Legal barriers - govt. grants monopoly status
      a.  Public franchise - post office
      b.  Patents - inventions
      c.  Licenses - TV, radio, physicians, etc.
2. Economies of scale - public utilities (sewer)
3. Exclusive ownership of scarce resource Alcoa (1940s) - bauxite and aluminum
4. Strategy (Microsoft)

Profit Maximization

Consumer and Producer Surplus

Economic Profit

Economic Rent

Capitalization of Economic Rent

Long-run Equilibrium

1. P>MC
2. Typically, P>ATC (before rent capitalization)
         P=ATC (after rent capitalization)
3. ATC is not at minimum ATC as in perfectly competitive market.

Case Against Monopoly

Loss of "Welfare" - welfare cost triangle

ATC not at minimum; excess capacity

Rent Seeking - resources are wasted to capture rents

X-inefficiency - organizational slack or operating at higher than minimum average cost

Perfect price discrimination.
      P=MC for last unit
Second degree price discrimination.
Third degree price discrimination.
Arbitrage (buying low, moving to a higher priced market, and selling high) must be impossible or difficult for price discrimination to be successful.

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