ACJC Firms and Decisions (2) Market Structure

© ACJC Economics Dept/2023/Firms and Decisions (2): Market Structure 1 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics H2 Firms and Decisions (2) MARKET STRUCTURE Section Content Page 1 PRIMARY OBJECTIVE: PROFIT MAXIMISATION (RECAP) 5 1.1 Revenue and Cost Concept 5 1.2 Profit Concepts 5 2 CHARACTERISTICS OF MARKET STRUCTURES 6 2.1 Characteristics of Market Structures 6 2.2 Types of Market Structures and their Characteristics 11 2.3 Differences between Perfect and Imperfect Markets 12 2.4 Level of Competition 15 3 BEHAVIOR OF FIRMS I: PRICE AND OUPUT DECISIONS, TYPES OF PROFITS 17 3.1 Profit Maximising Equilibrium 18 3.2 Types of Profits 19 3.3 Equilibrium of a Firm with Imperfect Information (Cost-Plus Pricing) 28 3.4 Price and Output Decisions for Oligopolies 29 3.5 Price and Output Decisions in Contestable Markets 31 4 BEHAVIOR OF FIRMS II: STRATEGIES TO INCREASE PROFITS 33 4.1 Strategies to Raise Revenue 33 4.2 Strategies to Reduce Costs 39 4.3 Growth Strategies 41 5 PERFORMANCE AND EVALUATION OF MARKET STRUCTURES 45 5.1 Key Concepts and Criteria 45 5.2 Impact on Society’s Welfare Across Market Structures 48 6 GOVERNMENT INTERVENTION FOR MARKET DOMINANCE 55 Reference Text (Optional): 1. Case, Fair, Oster. Principles of Economics, Special Edition for ACJC, Pearson, 2013. Chapters 12 - 15. 2. John Sloman, Economics, 8th Edition, Prentice Hall. Chapters 6-8. 3. Mankiw, Quah & Wilson. Principles of Economics, An Asian Edition, CENGAGE Learning. Chapters 14-17.

© ACJC Economics Dept/2023/Firms and Decisions (2): Market Structure 2 WHAT IS THIS TOPIC ABOUT? In part 1 of this topic, “Firms and Decisions (1) – Production & Cost”, we have learned that firms have a chief purpose of maximising profits. However, there are sometimes exceptions due to constraints or alternative objectives. Costs concepts are therefore an essential consideration for firms to achieve their objectives. Moving into the next part of Firms and Decisions, we will learn ho w firms in different industries face different level of competition, impacting the amount of revenue earned. Optimising both revenue and costs, firms will more likely achieve their overall aim of maximum profit. In “Firms and Decisions (2) – Market Structure”, we will examine the characteristics, the behaviour as well as evaluate the performance of firms in both perfect and imperfect markets. You will learn about these four market structures:  Perfect competition (many small firms, each without market power/dominance)  Imperfect markets: o Monopoly (one firm has huge market power) o Oligopoly (few big firms dominating the market, each with strong market power but firms are inter-dependent) o Monopolistic competition (many small firms, each with weak market power) In understanding and evaluating the behaviour and performance of such firms, the focus will be on the following key questions:  How do firms determine their equilibrium output and price?  How do they compete with other firms in the same industry?  What are the implications of their behaviour from society’s point of view? In evaluating their decisions, you may want to weigh the benefits and costs of their actions, not only to the firms themselves but to consumers, other firms, and the society at large.

© ACJC Economics Dept/2023/Firms and Decisions (2): Market Structure 3 LEARNING OUTCOMES Enduring Understanding:  The primary aim of firms is to maximise profit.  The stronger the barriers to entry, the fewer the number of firms, and hence the stronger the market power possessed by existing firms in the industry.  Firms make decisions by comparing the marginal benefits and marginal costs of their actions.  The firm’s performance is evaluated based its on efficiency and welfare impact on society.  Where market dominance is present in industries producing essential goods and services, the concerns relating to inefficiency and inequity may prompt government to intervene through public policy measures. Essential Questions  Should firms use price or non-price competition strategies to achieve their objective of profit maximisation?  What are the factors that influence a firms’ price and output decision?  Is it desirable to have more competition in all industries?  Should government intervene to ensure greater competition?

© ACJC Economics Dept/2023/Firms and Decisions (2): Market Structure 4 PRE-LECTURE ACTIVITY Article 1: The rise of ride-hailing apps Through thick and thin (waitslines) – Singaporean’s enduring love affair with fast food When American burger joint Shake Shack opened its doors at Jewel Changi Airport in April, Mr Watt Zhong Qing, 29, was one of the first in line. He said that back in 2013, when Filipino fast food chain Jollibee first arrived here, he queued 3.5 hours just for a taste of it. “(It) was worth it,” said the food enthusiast, whose affinity with fast food started when he was 10 and his aunt bought him McDonald’s Happy Meal, which came with a toy. These days, long queues could still be spotted whenever new fast foo d players came to town, as seen recently with the opening of Shake Shack and A&W at Jewel Changi Airport. New flavours introduced by the fast food chains also tend to generate much buzz, with offerings sometimes sold out in just weeks, such as McDonald’s Nasi Lemak Burger. Over the past decades, the major fast food chains have grown expanded rapidly in Singapore. For example, there are now 135 McDonald’s outlets and 86 KFC joints scattered across the island. Burger King will be opening its 50th outlet in Singapore in July, its spokesperson said. Based on data from market research firm Euromonitor International, McDonald’s had the largest market share (40 per cent) in Singapore last year — way ahead of its closest rival, KFC (13 per cent). In its report, the firm included convenience store chain 7-eleven, which came in joint- third with Subway, with both having 6 per cent of the market share, Next was Burger King (4 per cent), followed by Pizza Hut (3 per cent). The Soup Spoon, Pasta Mania and Long John Silver’s each has a market share of about 2 per cent. Adapted from: The Straits Times, 11 June 2019 Question to consider before lecture: Given the entry of new fast food chain – Shake Shack, A&W, and Jollibee in Singapore, c onsider the likely effect s on the following economic agents. 1. Consumers 2. Incumbent firms like McDonald’s

© ACJC Economics Dept/2023/Firms and Decisions (2): Market Structure 5 1. OBJECTIVES OF FIRMS (RECAP) This section is a summary of what you have learnt in Firms and Decision (Part 1). Primary Objective: Profit Maximisation  Profit is the difference between Total Revenue (TR) and Total Cost (TC). Firms can increase profit by either raising total revenue or reducing total cost.  The primary assumption is that all firms aim to maximise profit.  By the marginal principle, total profit will be maximised at the output level where MR=MC.  This output level is termed the firm’s equilibrium output and the corresponding price is the firm’s price. 1.1 REVENUE AND COST CONCEPTS Total Revenue (TR)  Firm’s earning from sale of total output  Price x Output (P x Q) Total Cost (TC)  Summation of the total fixed cost and total variable cost  TC = TFC + TVC  TC = AC x output produced Average Revenue (AR)  Earning per unit of output  Total Revenue (P x Q) Total Output (Q)  AR = P Average Cost (AC)  Total cost of production per unit of output  AC =AFC+AVC  Total Cost (TC) Total Output (Q) Marginal Revenue (MR)  Increase in total revenue that results from production of one more unit of output  Change in TR (TR) . Change in Output (Q) Marginal Cost (MC)  Increase in total cost that resu