Long-Run Equilibrium
Assumptions
1.Large number of buyers and sellers
a.Sellers ar outlay takers (Microsoft cant really adjustment its price without loosing a lot of money)
2.Free entry and exit
a.Free enterprise: no artificial barriers to entry or exit
b.No social, political, or stinting impediments to entering/exiting a market
3.Many close substitutes
a.Products are unvarying Þ buyers prefer the lowest price
b.Differentiation:
i.Physical characteristics, marketing/advertising, etc
ii. be in the mind of the consumer regardless of reality
4.Zero transactions cost
5.Buyers and sellers gift complete information
6.Firms have identical costs and technology (Not required. Makes intent easier in class)
In a competitive market:
Companies mettle a perfectly elastic demand curve due to competitive process
Market price is also marginal revenue
oP = MR
Golden Rule
oProfit maximizing equalizer is an price/output level where MR = MC
oReal bearing Decision Making:
?MR > MC ?Do more!
?MC > MR ? Do less!
oAverage and total costs are not relevant Marginal costs are what matter!
?Fixed costs do not change as Q increases
?Average costs may not debate marginal changes (Often MC MR Þ do less
Windows Operating System:
vindication from profit erosion due to competitive forces comes from a sustainable Competitive Advantage (SCA)
Decisions are made on the margin
otherwise decision points and profit maximaze mistakes
Competitive process restricts profits towards preceding(prenominal) normal rate of return
Monopoly power:
Power to raise prices above competitive levels or restrict competition
Arises from competitive advantages and barriers to entry
Network effects (demand-side effects)
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