Download perfectly competitive market

Part 4
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Revenue, Average Revenue, Marginal Revenue
Competitive Market
Perfectly and Imperfectly Competitive Markets
Perfectly Competitive Market
Characteristics
Profit, Break-even Price, Loss
Supply Curve in Short-run Period
Long-run Equilibrium
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This project is co-financed by the European Union
1
Revenue
Revenue
Revenue generally depends on the price of the
good and the quantity sold
Sold quantity
TR = P.Q
Price of a good
Total revenue
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This project is co-financed by the European Union
2
Revenue
Average Revenue
Average revenue is a revenue per unit of output
TR P.Q
AR 

P
Q
Q
Marginal Revenue
Marginal revenue is the additional revenue from
producing (and selling) one more unit of output
TR
MR 
Q
___________________________________________________________________________
This project is co-financed by the European Union
3
Competitive Market
Characteristics of Perfectly Competitive Markets
1. Price taking
2. Product homogeneity
3. Free entry and exit
___________________________________________________________________________
This project is co-financed by the European Union
4
Competitive Market
Price taking
The individual firm sells a very small share of the
total market output and, therefore, cannot influence
market price
The individual consumer buys too small share of
industry output to have any impact on market price
___________________________________________________________________________
This project is co-financed by the European Union
5
Competitive Market
Product homogeneity
The products of all firms are perfect substitutes
Free entry end exit
Buyers can easily switch from one supplier to
another
Suppliers can easily enter or exit a market – there
are no barriers for entering or exiting the market
___________________________________________________________________________
This project is co-financed by the European Union
6
Competitive Market
Revenue - perfectly competitive market
The price is
fixed (given)
TR = P.Q
TR P.Q
AR 

P
Q
Q
TR is a linear
function of Q
AR  MR  P
TR P.Q P.Q
MR 


P
Q
Q
Q
___________________________________________________________________________
This project is co-financed by the European Union
7
Competitive Market
Revenue - perfectly competitive market - example
P=5
TR = 5Q
TR  P.Q  5.Q
CZK
CZK/ Q
10
MR  AR  d  5
5
5
1 2
Q
1 2
Q
___________________________________________________________________________
This project is co-financed by the European Union
8
Competitive Market
Characteristics of Imperfectly Competitive Markets
1. Price making
2. Product homogeneity or heterogeneity
3. Entry barriers
___________________________________________________________________________
This project is co-financed by the European Union
9
Competitive Market
Price making
The firm is large enough (has a significant market
power) to adjust the prices
The individual consumer still buys too small share of
industry output to have any impact on market price
(The opposite is a monopsony but we neglect this here )
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This project is co-financed by the European Union
10
Competitive Market
Product homogeneity or heterogeneity
2 extremes:
- the products of all firms are perfect substitutes
- no substitute exists
Entry barriers
There are significant entry barriers like high entry
cost, license etc.
___________________________________________________________________________
This project is co-financed by the European Union
11
Competitive Market
Revenue - imperfectly competitive market
The firm is able to
The price is changing
change the price
with demanded quantity
P  a  b.Q
TR  P.Q  (a  b.Q)Q
TR
AR 
 a  b.Q  P
Q
MR  AR  P
dTR d (a  b.Q)Q
MR 

 a  2bQ
dQ
dQ
___________________________________________________________________________
This project is co-financed by the European Union
12
Competitive Market
Revenue - imperfectly competitive market - example
P  10  Q
CZK
TR  P.Q  (10  Q)Q  10 Q  Q 2
TR  P.Q  10Q  Q 2
CZK/ Q
10
AR=10-Q
MR=10-2Q
5
Q
5
10
Q
___________________________________________________________________________
This project is co-financed by the European Union
13
Competitive Market
Demand - perfectly competitive market
Kč / Q
e pd  
Perfectly elastic demand
MR  AR  d
P
Q
___________________________________________________________________________
This project is co-financed by the European Union
14
Competitive Market
Demand - imperfectly competitive market
TR  P.Q  10Q  Q 2
MR=10-2Q
Kč
AR=P=d=10-Q
Kč / Q
e pd  1
10
epd  1
e pd  1
epd  1
epd  1 epd  1
5
Q
5
10
Q
___________________________________________________________________________
This project is co-financed by the European Union
15
Profit
Profit
Profit of the firm is a difference between total
revenue and total cost
  TR  TC
maximize
d
0
dQ
dTR dTC

0
dQ
dQ
MR  MC
___________________________________________________________________________
This project is co-financed by the European Union
16
Perfectly Competitive Market
Short run
MR  MC
Profit-maximizing
firm will produce
at the level of
output Q0
___________________________________________________________________________
This project is co-financed by the European Union
17
Perfectly Competitive Market
Short run – economic profit
π
Profit per unit of
output

 P0  ATC0
Q
___________________________________________________________________________
This project is co-financed by the European Union
18
Perfectly Competitive Market
Short run – break-even price
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This project is co-financed by the European Union
19
Perfectly Competitive Market
Short run – economic loss
P  AVC
STAY
P  AVC
SHUT
DOWN
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This project is co-financed by the European Union
20
Perfectly Competitive Market
Short run – loss of fixed cost
Fixed cost
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This project is co-financed by the European Union
21
Perfectly Competitive Market
Short run – loss greater than fixed cost
Fixed cost
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This project is co-financed by the European Union
22
Perfectly Competitive Market
Short run – supply curve
P  AVC
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This project is co-financed by the European Union
23
Perfectly Competitive Market
Long run
Profitable market
S0
P
S1
P0 (  0)
P1 (  0)
Entry of new firms
S0  S1
Q0  Q1
D
Q0 Q1
P0  P1
π=
0
Q
___________________________________________________________________________
This project is co-financed by the European Union
24
Perfectly Competitive Market
Long run equilibrium
SMC
LMC
P
(CZK/Q)
LAC
SAC
P = LMC
P = min LAC
MR  AR
P
1
Q*
Q
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This project is co-financed by the European Union
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