Download Lesson 17: Pure Competition Average cost

Lesson 17: Pure Competition
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Average cost- total cost per unit
Fixed Cost-cost that does not vary with
output
Variable cost-cost that varies with the
volume of output
Total cost- the sum of all expenditures
Marginal cost-additional cost incurred as
additional units of products all produced
Marginal revenue-additional revenue that
a seller receives by selling an additional unit
Total revenue-price of the product times
the number of units sold
Purely Competition
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Presence of large nos. of buyers and sellers
Output/product is available in the market
and is homogeneous
Infinitely elastic
Perfectly competition
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Homogeneous product
Producers and consumers has no power to
influence price. (by nature)
Many buyers and sellers of the product
Sufficient knowledge is needed
Freedom to leave and enter the industry
A large numbers of sellers and buyers of a
commodity, each would be too small a unit to affect
the price if the commodity.
The firm faces an infinitely elastic demand curve.
The firm can sell any amount it can produce at that
price.
The market price is then determined by the
interaction of demand.
Short run
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time frame indicating a firm can vary its
output
does not have time to change plant size
number of firms are fixed
Economic profit
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Pure surplus or an excess of total
receipts overall cost of production.
Costs are obligations
Costs
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Utilities
Labor
Fixed cost
Short run equilibrium of the firm
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Should I produce?
What will I produce; and how much?
Will I realize a profit?
How much profit?
Breakeven point-total revenue equals total costs
Formulas:
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Total Revenue(TR)=Price (P) x Quantity (Q)
Total Cost(TC)=Fixed cost(FC) + variable
cost(VC)
Profit=TR-TC
Marginal revenue(MR)=change in TR
change in Q
Marginal Cost(MC)=change in TC
Change in Q
Average cost(AC)=TC
Q
Profit/unit=Price-AC
Additional revenue derived by the firm by producing
an additional unit
Additional cost goes in the production of a
commodity
Total profit is obtained by multiplying profits per unit
by quantity.
Long run
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a time period in which a firm can adjust
capacity. All inputs can be varied
no incentive or no opportunity change
P=LMC=MR
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Firms in the industry are in status quo
Economic profits no longer exists
No losses are being incurred
How is competition maker evaluated
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Efficient allocation of resources-fosters
comes about because businesses and
resources seek self-interest.
 Effect to the efficiency principleimplies that production must not
only be technically efficient
 Works of the competitive principle
Shortcomings of the competitive price
system
 The income distribution problem
 Market failure: external costs and
public goods
Spillover or external costs-significant costs accrued
to society
Spillover or external benefits-satisfaction or
benefits of society
Lesson 18: monopoly
Pure monopoly refers to the form of market
organization in which there is a single firm producing
a commodity. Sole producer of a product
The demand curve of a monopolist is downward
sloping
Monopolist is with the question:
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At what point would I be losing?
At what point would I break-even?
At what point would I maximize profit?
Profits-revenues are greater than costs
Maximum profit-positive difference between total
revenue and total cost is greatest.
Pure competition
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Equilibrium price
Perfectly elastic demand
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Most efficient rate of output
Monopoly
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Maximizes profit (MR=MC)
Not perfectly elastic
Welfare considerations
Not efficient
Control over price
Plurality-many buyers and sellers
Lesson 19: Oligopoly
Oligopoly is market structure characterized by a
small number of firms and a great deal of
interdependence among them.
2 types of Oligopoly
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Pure oligopoly-products produced by
various firms are identical
Differentiated oligopoly-exist in industries
where products are not homogeneous.
Collusion-a secret agreement between two or more
person or institutions to achieve certain objectives
-involves direct negotiation
3 major incentives
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Can increase their profits
Decrease oligopolistic uncertainty
Firms already in an industry will facilitate
blocking newcomers
Cartel-a formal organization of the producers within
a given industry
Characteristics
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Producers and sellers are included
Agreement is definite and enforceable on
all parties
Covers both price to be charged and
quantity of output
Formula for disturbing the profits
Adhere rigorously
Imperfect collusion-tacit informal agreement
Lesson 21: circular flow of economic activity
Centralized cartel-monopolistic maximization of
industry profits and firms in the industry have
surrendered.
Economic resources
Barriers to entry
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Natural barriers-consists of putting up a
large and complex plant
Artificial barriers-government regulations
and patent rights
A cartel must either control output or detect and
prevent “cheating” in the form of under-the-counter
price reductions
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Natural
Human
Capital/technological
Entrepreneurial
The circular flow of economic activity includes the
flow of the production process and the flow of
income.
2 economic units
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Household: consuming unit
Firm: producing unit
Output of oligopoly
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Demand curve is downward
MR<price
Depend upon its quota
Spontaneous coordination-mutual interdependence
among firms
Lesson 20:government regulation of markets
Government
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Plays a very important role
Gives a company an exclusive franchise
Created a condition called natural
monopoly
Objective: work for the improvement of the
people’s standard of living
Has to allocate economic resources to
achieve their vision
Production is the use of economic resources in the
creation of goods and services
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Flow-quantity measured at a particular period of
time
Stock-quantity measured as a given point of time
Wealth-anything of value owned
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The Philippines is a market economy
Private enterprise is the hallmark of the market
economy
Landowners earns rent
Capitalists earns interest
Laborers earns wages
Entrepreneurs earns profit
Flow of physical goods is accompanied by a
flow of income
Flow of income and consumption
expenditures that involves financial
transactions
Money flow involves in the transactions in
production
Exports-sells good to countries
Imports-buys from other country goods and services
Corporations are the core of economy
Philippine economy
Medium Term Development plan(MTPDP)-envisions
a sustainable development path anchored on growth
with social equity
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Has free enterprise in nature
Open and mixed economy
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Money is the inducing factor and the pillar of the
price system
Mixture of three forms of economic
systems
Income-rate at which money is earned
Market structure
Market structure
# of sellers
Product
Entry to industries
Price strategy
Perfect competition
Many
Homogeneous
Easy
Price taken
Monopoly<monopsony
Oligopoly
One
One
No entry
Price maker
Few
Differentiate
Difficult
Independent
Monopolistic
competition
Many
Similar
Easy
Price maker