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Chapter 6 Market Structure

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Chapter 6 Market Structure

Markets
A market consists of all firms and individuals who are willing and able to buy or sell a particular product. Potential entrants are all individuals and firms that pose a sufficiently credible threat of market entry to affect the pricing and output decisions of incumbent firms.

Market structure refers to the basic characteristics of the market environment, including (1) the number and size of buyers, sellers, and potential entrants; (2) the degree of product differentiation; (3) the amount and cost of information about product price and quality; and (4) the conditions for entry and exit.

Competitive Markets * A large number of potential buyers and sellers * Product homogeneity * Rapid dissemination of accurate information at low cost * Free entry into and exit from the market

Individual buyers and sellers rake the market price for the product as given-no single participant has any real control over price. If a seller charges more than the market price, buyers simply will purchase the product from other suppliers. And firms always can sell their output at the market price; thus they have no reason to offer discounts to attract buyers. In this setting, firms view their demand curves as horizontal-a firm can sell any feasible output at the market price, P* -but sells no output at a price above P*.

The demand curve is horizontal. Both marginal revenue and average revenue are equal to the market price.

Marginal revenue is equal to price (P). In the short run, the firm takes its plant size (and possibly other inputs) as given. The relevant cost is short run marginal cost (SRMC). The condition for short-run profit maximization in a competitive industry is '

P* = SRMC (6.1)

When the price of the product is insufficient to cover its average variable cost (AVC), the firm is better off if it ceases

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