INDUSTRIAL ECONOMICS

CHAPTER ONE

Introduction to firms and market structure

Definition

Industrial organization: The manner in which a market or industry is organized or

structured, especially in terms of the competitiveness of the firms making up the market or
industry.

This phrase is also used to mean the economic study of the organization or an industry. When
used for the competitiveness of a market, the term market structure can be used interchangeably.
Industrial organization is concerned with the competitiveness of market, what this means for
market control by buyers or sellers, and how this affects the efficiency of production.

The New Industrial Organization

• The “New Industrial Organization” is something of a departure

– theory in advance of policy

– recognition of connection between market structure and firms’ behavior

Contrast pricing behavior of:

– grain farmers at first point of sale

– gas stations: Texaco, Mobil, Exxon

– computer manufacturers

– pharmaceuticals (proprietary vs. generics)

Efficiency and Market Performance

• Contrast two polar cases

– perfect competition
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 – monopoly

What is efficiency?

– no reallocation of the available resources makes one economic agent better off
without making some other economic agent worse off

– example: given an initial distribution of food aid will trade between recipients
improve efficiency?

Focus on profit maximizing behavior of firms

Take as given the market demand curve

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Perfect Competition: is a situation prevailing in a market in which buyers and sellers are so
numerous and well informed that all elements of monopoly are absent and market price of
commodity is beyond the control of individual buyers and sellers.

Perfect competition is a market structure where many firms offer a homogenous product .
because there is freedom of entry and exit and perfect information, firms will make profit and
prices will be kept low by competitive pressures.

Features of perfect competition

- many firms
- freedom of entry and exit
- all firms produce identical products
- all firms are price takers , therefore the firms’ demand curve is perfectly
elastic.
- There is perfect information and knowledge

Therefore, marginal revenue equals price , To maximize profit a firm of any type must equate
marginal revenue with marginal cost . So in perfect competition price equals marginal cost.

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Monopoly

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Efficiency and Surplus

Can we reallocate resources to make some individuals better off without making others worse
off?

• Need a measure of well-being

– consumer surplus: difference between the maximum amount a consumer is

willing to pay for a unit of a good and the amount actually paid for that unit

– aggregate consumer surplus is the sum over all units consumed and all consumers

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 – producer surplus: difference between the amount a producer receives from the
sale of a unit and the amount that unit costs to produce

– aggregate producer surplus is the sum over all units produced and all producers

– total surplus = consumer surplus + producer surplus

Deadweight Loss: in economic deadweight loss also known as excess burden or Allocative
inefficiency.

Is a loss of economic efficiency that can occur when equilibrium for a good or service is not
achieved or is not achievable?

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Why can the monopolist not appropriate the deadweight loss?

– Increasing output requires a reduction in price

– this assumes that the same price is charged to everyone.

The monopolist creates surplus

– some goes to consumers

– some appears as profit

The monopolist bases her decisions purely on the surplus she gets, not on consumer surplus

• The monopolist undersupplies relative to the competitive outcome

• The primary problem: the monopolist is large relative to the market

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 …………………………..END………………………………….

ASSIGNMENT

1. Please in advance search Anti-trust Policy?

Submission Date: 03/08/016

Wednesday 4:00- 5:30

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