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Lesson 17: Pure Competition 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 Presence of large nos. of buyers and sellers Output/product is available in the market and is homogeneous Infinitely elastic Perfectly competition 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 time frame indicating a firm can vary its output does not have time to change plant size number of firms are fixed Economic profit Pure surplus or an excess of total receipts overall cost of production. Costs are obligations Costs Utilities Labor Fixed cost Short run equilibrium of the firm 1. 2. 3. 4. 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: 1. 2. 3. 4. 5. 6. 7. 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 a time period in which a firm can adjust capacity. All inputs can be varied no incentive or no opportunity change P=LMC=MR Firms in the industry are in status quo Economic profits no longer exists No losses are being incurred How is competition maker evaluated 1. 2. 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: 1. 2. 3. 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 Equilibrium price Perfectly elastic demand Most efficient rate of output Monopoly 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 1. 2. 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 1. 2. 3. 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 1. 2. 3. 4. 5. 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 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 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 Household: consuming unit Firm: producing unit Output of oligopoly Demand curve is downward MR<price Depend upon its quota Spontaneous coordination-mutual interdependence among firms Lesson 20:government regulation of markets Government 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 Flow-quantity measured at a particular period of time Stock-quantity measured as a given point of time Wealth-anything of value owned 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 Has free enterprise in nature Open and mixed economy 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