MICROECONOMICS

CHAPTER 7&8:
MARKET STRUCTURE
I. PERFECT COMPETITION
1. Definition
• A type of market in which there are many sellers
and buyers, homogeneous products.
• Example: Agriculture...
2. Characteristics
• Many buyers and sellers.
• Homogenous products (perfect substitutes).
• Firms can freely enter or exit the market.
• Both buyers and sellers have perfect information about
products.
• None of the firms are large enough to influence the
market price and quantity (determined by supply and
demand law)
 Perfectly competitive firms are price takers (P E) –
take the price as given
3. Demand and Marginal Revenue curves
for perfectly competitive firms

Market Firm

4
Demand Curve for a Perfectly
Competitive Firm
• Total revenue (TR) TR = P x Q
• Average revenue (AR) TR
AR = =P
The amount of revenue a firm receives for Q
each unit of output

• Marginal revenue (MR): ∆TR

The change in TR from
MR =
∆Q
selling one more unit.

⇨ Demand curve (D) = Marginal revenue curve (MR) = PE =

Average revenue curve (AR)
 1
ACTIVE LEARNING

Calculating TR, AR, MR

Fill in the empty spaces of the table.

Q P TR AR MR

0 $10 n/a

1 $10 $10

2 $10

3 $10

4 $10 $40
$10
5 $10 $50
3. Demand and Marginal Revenue curves
perfectly competitive firms

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4. Firm’s Short-run Production Decision

• What Q maximizes the firm’s profit?

The firm maximizes profit by producing the quantity at
which marginal cost equals marginal revenue

Rule: MR = MC at the profit-maximizing Q**.

• Profit at Q* :
𝝿 = TR – TC
𝝿 = P x Q* – ATC x Q*
𝝿 = Q* x (P– ATC)
• Consider P and ATC
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 Consider P and ATC
Note: If shut down in short run (A short-run decision not to
produce anything because of market conditions), firm must
still pay fixed costs (FC)
Case 1: P > ATC ⇨𝝿 > 0 ⇒ sx Q*

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Case 2: P = ATC ⇨𝝿 = 0 ⇒ sx Q* ?

• Stop producing (short run): the firm loses fixed costs.

• Continue producing: there is additional revenue to cover the
fixed costs.
⇒ produce Q*

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Case 3: AVC < P < ATC ⇨𝝿 < 0 ⇒ sx Q* ?

• Stop production (short run): the firm loses fixed costs.

• Continue production: there is additional revenue to partially
cover fixed costs.
⇒ produce Q* in order to minimize losses

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Case 4: P < AVC ⇨𝝿 < 0 ⇒ the firm will
stop producing Q* in the short run

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A Competitive Firm’s short-run Supply Curve

The firm’s short-run supply

curve is the portion of
its MC curve above AVC.
Production decision of a perfectly
competitive firm
• Firm’s short-run decision: MR = MC = PE and
PE ≥ AVC min
• Firm’s long-run decision: MR = MC = PE and
PE ≥ ATC min

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Nhập ngành TTCTHH ảnh hưởng đến Q để tối đa
hóa lợi nhuận của DNCTHH
Xuất ngành TTCTHH ảnh hưởng đến Q để tối đa
hóa lợi nhuận của DNCTHH

SV thực hiện tương tự

16
 SUMMARY

• Khái niệm (Definition)

• Đặc điểm (Characteristics)
• Đường cầu (D) và đường doanh thu biên (MR) của DN CTHH
(Demand and Marginal Revenue curvers for perfectly
competitive firms)
• Quyết định sản xuất trong ngắn hạn; dài hạn của DN CTHH
(Production decisions of a perfectly competitive firm in the short
run and long run)
• Đường cung ngắn hạn của DN CTHH (Short run supply curve of
a perfectly competitive firm)
• Trường hợp nhập hoặc xuất ngành của DN CTHH ảnh hưởng đến
sản lượng “Q” tối đa hóa lợi nhuận của DN CTHH trong ngành
• Giá hòa vốn của DNCTHH (break-even point)
II. MONOPOLY
1. Definition
• A monopoly is a firm that is the sole seller of
a product without close substitutes.
• In this chapter, we study monopoly and
contrast it with perfect competition.
• The key difference:
A monopoly firm has market power, the
ability to influence the market price of the
product it sells. A competitive firm has no
market power.
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2. Characteristics

• The only seller in the market

• Without substitutes
• Imperfect information
• Barriers to entry – other firms cannot enter the market
⇒ Monopoly firms are not price-takers.

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 Why Monopolies Arise

The main cause of monopolies is barriers

to entry—other firms cannot enter the market.
Three sources of barriers to entry:
1. A single firm owns a key resource.
E.g., DeBeers owns most of the world’s
diamond mines
2. The govt gives a single firm the exclusive right to produce
the good.
E.g., patents, copyright laws
 Why Monopolies Arise
3. Natural monopoly: a single firm can produce the entire
market Q at lower cost than could several firms.

Example: 1000 homes

Cost Electricity
need electricity
ATC slopes
ATC is lower if downward due
one firm services to huge FC and
all 1000 homes $80 small MC
than if two firms $50 ATC
each service
Q
500 homes. 500 1000
3. Demand and Marginal Revenue curves
for Monopoly firms

P A monopoly firm is the only seller,

so it faces the market demand curve.
To sell a larger Q,
the firm must reduce P.
Thus, MR ≠ P.

Q
A monopolist’s
demand curve
 1
ACTIVE LEARNING

A monopoly’s revenue
Common Grounds
is the only seller of Q P TR AR MR
cappuccinos in town. 0 $4.50 n.a.
The table shows the 1 4.00
market demand for
2 3.50
cappuccinos.
3 3.00
Fill in the missing
spaces of the table. 4 2.50
What is the relation 5 2.00
between P and AR?
6 1.50
Between P and MR?
 Demand curve for monopoly firm

• QD = aP + b (a < 0)  P = (1/a)QD - b/a (a < 0)

• MR = (TR)’Q (Q = QD)
• TR = P * Q = (1/a)Q^2 - (b/a)*Q
• (TR)’Q = ((1/a)Q^2 - (b/a)*Q)’Q = (2/a) Q – b/a = MR
 Marginal revenue curves are twice as steep as demand
curves.
Marginal revenue curve is below demand curve.
3. Demand and Marginal Revenue curves
for Monopoly firm

D
MR

Q
4. Monopoly firm’s short-run production
decision
Profit-Maximization
Costs and
Revenue MC
1. The profit-
maximizing Q* P
is where
MR = MC.
2. Find P from D
the demand MR
curve at this Q*.
Q* Quantity

Profit-maximizing output
4. Monopoly firm’s short-run production decision
Profit-Maximization

• A monopoly’s profit at Q* :
π = TR - TC
(Hàm theo biến sản lượng “Q*”)
π = PxQ* - ATCxQ*
π = Q* x (P – ATC)
• Consider P and ATC:

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 • Note: If shut down in short run, firm must
Consider P and ATC still pay fixed costs (TFC)
Case 1: P > ATC  π > 0  produce Q*
• Q* = Q0; P = P0

Lợi nhuận > 0

P, C

Q
Case 2: P = ATC ⇨𝝿 = 0 ⇒ sx Q* ?

• Stop producing (short run): the

firm loses fixed costs.
• Continue producing: there is
additional revenue to cover the
fixed costs.
⇒ produce Q*
Case 3 : AVC < P < ATC  π < 0  sx Q* ?
• Stop producing (short run): the firm loses fixed costs.
• Continue producing: there is additional revenue to partially cover the fixed costs.
⇒ produce Q* in order to minimize losses

P, C

Q
Case 4: P < AVC π < 0  monopoly firm will stop
producing Q* in the short run

P, C

Q
A Monopoly Does Not Have an S Curve

A competitive firm
• takes P as given
• has a supply curve that shows how its Q depends on P.
A monopoly firm
• is a “price-maker,” not a “price-taker”
• Q does not depend on P;
Q and P are jointly determined by
MC, MR, and the demand curve.
Hence, no supply curve for monopoly.
 Production decision of monopoly firm

- Monopoly firm’s short-run decision: MR = MC

(P>MC) and P > = AVC

- Monopoly firm’s long-run decision: MR = MC

(P>MC) and P > = ATC
6. The Welfare Cost of Monopoly (So sánh TTCTHH và TTĐQ
quyết định sx Q ảnh hưởng đến cs; ps và tổn thất vô ích XH)

Cạnh tranh hoàn hảo
Giá
Thặng dư tiêu dùng
Monopoly results in
Độc quyền
a deadweight loss
Giá
Thặng dư tiêu dùng

Thặng dư tiêu dùng chuyển

sang nhà độc quyền

Chi phí xã
hội

Thặng dư sản
xuất

Lượng Lượng
 Price Discrimination

• Discrimination: treating people differently based on some

characteristic, e.g. race or gender.
• Price discrimination: selling the same good
at different prices to different buyers.
• The characteristic used in price discrimination
is willingness to pay (WTP):
• A firm can increase profit by charging a higher price to
buyers with higher WTP.
 Perfect Price Discrimination vs.
Single Price Monopoly

Consumer
Price
surplus
Here, the monopolist
charges the same price Deadweight
PM
(PM) to all buyers.
loss
A deadweight loss
results. MC
Monopoly
profit D
MR

QM Quantity
 Perfect Price Discrimination vs.
Single Price Monopoly

Here, the monopolist

produces the Price
Monopoly
competitive quantity, but profit
charges each buyer his or
her WTP.
This is called perfect
price discrimination. MC
The monopolist captures D
all CS
MR
as profit.
But there’s no DWL. Quantity
Q
 Price Discrimination in the Real World

• In the real world, perfect price discrimination is not possible:

• No firm knows every buyer’s WTP

• Buyers do not reveal it to sellers
• So, firms divide customers into groups
based on some observable trait
that is likely related to WTP, such as age.
 Examples of Price Discrimination

Movie tickets
Discounts for seniors, students, and people
who can attend during weekday afternoons.
They are all more likely to have lower WTP
than people who pay full price on Friday night.
Airline prices
Discounts for Saturday-night stayovers help distinguish
business travelers, who usually have higher WTP, from more
price-sensitive leisure travelers.
 Examples of Price Discrimination

Discount coupons
People who have time to clip and organize coupons are
more likely to have lower income and lower WTP than
others.
Need-based financial aid
Low income families have lower WTP for
their children’s college education.
Schools price-discriminate by offering
need-based aid to low income families.
Examples of Price Discrimination

Quantity discounts
A buyer’s WTP often declines with additional units, so firms charge
less per unit for large quantities than small ones.
Example: A movie theater charges $4 for
a small popcorn and $5 for a large one that’s twice as big.
 SUMMARY

• Khái niệm (Definition)

• Đặc điểm (Characteristics)
• Phân loại ĐQ (Classification)
• Đường cầu (D) và đường doanh thu biên (MR) của DN ĐQ (Demand and
Marginal revenue curves for monopoly firms)
• Quyết định sản xuất trong ngắn hạn; dài hạn của DN ĐQ (Production
decision in the short run and long run of monopoly)
• So sánh thị trường CTHH và thị trường ĐQ quyết định sản xuất Q để tối
đa hóa lợi nhuận ảnh hưởng đến cs, ps và tổn thất vô ích của xã hội. (The
welfare cost of monopoly: consumer surplus, producer surplus,
deadweight loss)
• Phân biệt giá trong độc quyền (Monopoly price discrimination) (đọc thêm)
• Chính sách công trong hạn chế ĐQ (Public policy toward Monopolies)
(đọc thêm)
• Chú ý: bài tập, SGK, Lê Thế Giới (Chương 7)