Download Market Structure: Perfect Competition

FB 2400 Economics I
Topics
Market Structure
Market Structure: Perfect Competition
1.
What are the characteristics of perfect competition?
2.
What is the product demand curve facing a perfectly competitive firm?
3.
How a perfectly competitive firm decide how much output to produce?
3.1
3.2
3.3
4.
How much profit does a perfectly competitive firm make?
4.1
4.2
4.3
5.
What is the firm’s average total cost (ATC) curve?
How to calculate the firm’s profit (economic profit & economic loss)?
When TR (total revenue) = TC (total cost), i.e. zero economic profit,
why the economists still say that the firm is making normal profit?
What happens when perfectly competitive firms are making
5.1
5.2
6.
What is the firm’s marginal revenue (MR) curve?
What is the firm’s marginal cost (MC) curve?
How to determine the firm’s profit-maximising output?
economic profits?
economic losses?
What is the supply curve of a perfectly competitive firm?
Market Structure: Monopoly
1.
What are the characteristics of monopoly?
2.
What are “barriers to entry”?
3.
What is the product demand curve facing the firm (monopoly)?
4.
How the monopoly decide (i) how much output to produce? (ii) the price of its
output?
4.1
4.2
4.3
What is the firm’s MR curve?
What is the firm’s MC curve?
How to determine (i) profit-maximising output (ii) the profitmaximising price?
5.
How to compute the profit of the monopoly?
5.1
5.2
What is the firm’s ATC curve?
How to calculate the firm’s profit?
6.
What happens when the monopoly is making an “economic loss”?
7.
Comparing (i) perfect competition and (ii) monopoly.
Market Structure: Monopolistic Competition
1.
What are the characteristics of monopolistic competition?
2.
What is the demand curve facing the firm?
3.
How the firm decide (i) how much output to produce? (ii) the price of its
output?
3.1
3.2
3.3
4.
What is the firm’s MR curve?
What is the firm’s MC curve?
How to determine (i) profit-maximising output (ii) the profitmaximising price?
How to compute the profit of the firm?
4.1
4.2
What is the firm’s ATC curve?
How to calculate the firm’s profit?
5.
What would happen in the “short run”?
6.
What would happen in the “long run”?
What is the firm’s demand curve?
MARKET
g consumers
Consumer 1 ……
P
Consumer g
P
h firms
Firm 1
P
P
SM
P1
P1
D1
……
Firm h
P
P1
Dg
DM
QDP11
Q
P1
QDg
Q
g
Q
i 1
Large
Number of Firms
P1
Di
Q
Supply of Each Firm
is small
relative to TOTAL SUPPLY
of the MARKET
10 11 12
Q
UNITS OF PRODUCT
SOLD
PRICE CHARGED
THE SAME
FIRM’S DEMAND CURVE
IS HORIZONTAL
S
U
P
P
L
Y
C
U
R
V
E
s
h
o
w
s
t
h
e
L
O
W
E
S
T
Deriving Marginal Revenue (MR) Curve From A Horizontal Demand Curve
Consider the following demand schedule (horizontal demand curve):
Quantity
1
2
3
4
5
6
7
Price
$13
$13
$13
$13
$13
$13
$13
Total Revenue
Marginal Revenue
$26
$39
$13
(a)
Complete the table, that is, to calculate the (i) total revenue, and (ii) marginal
revenue.
(b)
Draw the (i) demand curve, and (ii) marginal revenue curve, on the same
diagram.
Deriving Marginal Revenue (MR) Curve From A Downward Sloping Demand
Curve
Consider the following demand schedule (downward sloping demand curve):
Quantity
1
2
3
4
5
6
7
Price
$13
$12
$11
$10
$9
$8
$7
Total Revenue
Marginal Revenue
$24
$33
$9
(a)
Complete the table, that is, to calculate the (i) total revenue, and (ii) marginal
revenue.
(b)
Draw the (i) demand curve, and (ii) marginal revenue curve, on the same
diagram.
WHAT HAPPENS WHEN FIRMS ARE MAKING ECONOMIC PROFIT?
EXISTING FIRMS
MARKET
…
FIRM 1
P
P
NEW FIRMS
FIRM h
FIRM h+1
P
…
P
FIRM h+k
P
MC
SM
S M’
MC
ATC
ATC
MR
DM
Q
Q
Q
Q
Q
What is the firm’s supply curve?
g consumers
……
Consumer 1
P
h firms
MARKET
Consumer g
P
SM
P
P1
P
P1
D1
……
Firm 1
MC
P
AVC
P1
Firm h
P1 = MR
Dg
DM
Q
Q
P1
D1
P1
Dg
Q
Q
g
Q
i 1
P
P1
Di
Firm’s Supply Curve
Si
What is the firm’s Supply Curve?
Q
Q
10 11 12
Q
Q
PMINIMUM x QMINIMUM = RMINIMUM
QMINIMUM x AVC
TVC
RELATION BETWEEN A MONOPOLIST’S AR & MR
P
INDUSTRY
= FIRM’S
DEMAND CURVE
DEMAND CURVE
MONOPOLY
MR
D=AR
Q
DERIVATION OF MR FROM DEMAND CURVE
MONOPOLY -------- A SINGLE SELLER SELLS A
PRODUCT FOR WHICH
THERE ARE NO GOOD
SUBSTITUTES
LINEAR DEMAND EQUATION:
p  a  bx
TR  px  ax  bx 2
d
(TR)
MARGINAL REVENUE: MR 
dx
TOTAL REVENUE:
MR  a  2b
A LINEAR MR EQUATION
SLOPE = – 2b (TWICE THE SLOPE OF THE
DEMAND EQUATION)
PRICE / OUTPUT DECISION UNDER MONOPOLY
PRICE / OUTPUT DECISION UNDER MONOPOLY
SHORT-RUN EQUILIBRIUM
SHORT-RUN EQUILIBRIUM
P
MC
ATC
P
MC
ATC
ECONOMIC
PROFIT
= P1P’C’C
P1
P’
BREAK
EVEN
C’
C
D=AR
P1
D=AR
MR
MR
Q
Q1
Q1
PRICE / OUTPUT DECISION UNDER
MONOPOLY
SHORT-RUN EQUILIBRIUM
P
ECONOMIC
LOSS
= P1CC’P’
MC
C
C’
P1
P’
ATC
D=AR
MR
Q1
Q
Q
What is the firm’s demand curve?
g consumers
……
Consumer 1
P
MARKET
Consumer g
h firms
P
Firm 1
SM
P
P1
P
P1
D1
……
Firm h
P
P1
Dg
DM
Q
Q
P1
D1
Q
P1
Dg
Q
g
Q
i 1
P1
Di
Q
10 11 12
Q
Q
S
P
1ST BUYER’S PRICE
2ND BUYER’S PRICE
3RD BUYER’S PRICE
Equi
Price
Consumer
Surplus
DEMAND CURVE shows
the HIGHEST price at which
a consumer is willing to pay
for each unit of good
Producer
Surplus
D
123
PERFECT COMPETITION
g consumers
Consumer 1 ……
MARKET
P
Consumer g
P
P
P1
CONSUMER
SURPLUS
h firms
SM
P1
D1
……
Firm 1
Firm h
P
P
P1
Dg
DM
Q
QDP11
P1
QDg
MONOPOLY
Q
PRODUCER
SURPLUS
CONSUMER
SURPLUS
P1
D1
Firm h
P
SM
P1
Q
……
Firm 1
P
Q
h firms
P
Consumer g
P
10 11 12
MARKET
g consumers
Consumer 1 ……
Q
QP.C .
P
P1
Dg
DM
QDP11
Q
P1
QDg
Q
PRODUCER
SURPLUS
Q
QP.C .
10 11 12
Q
Q
MRMONOPOLY
DEADWEIGHT SOCIAL LOSS
VERSUS
PERFECT COMPETITION
P
CONSUMER
SURPLUS
MARKET
CONSUMER
SURPLUS
MONOPOLY
P
SM
PMONO
PP.C.
MARKET
DEADWEIGHT
SOCIAL
LOSS
PP.C.
DM
DM
Q
PRODUCER
SURPLUS
SM
QP.C.
Q
PRODUCER
SURPLUS
QMONO QP.C.
MRMONOPOLY
MONOPOLY: USES PRICE DISCRIMINATION
PERFECT
COMPETITION
MONOPOLY
X USES
PERFECT
PRICE DISCRIMINATION
PRICE DISCRIMINATION
MARKET
USES 
MARKET
MARKET
st
CONSUMER
SURPLUS
P
1 buyer’s price
P
CONSUMER
SURPLUS
DEADWEIGHT
SOCIAL
LOSS
SM
PMONO
PP.C.
3rd buyer’s price
SM
SM
PP.C.
PP.C.
DM
DEADWEIGHT = 0
SOCIAL LOSS
DM DISAPPEAR
DM
Q
PRODUCER
SURPLUS
2nd buyer’s price
P
QP.C.
PRODUCER
SURPLUS
QMONO
Q
Q
QP.C.
PRODUCER
SURPLUS
MRMONOPOLY
QP.C.
CONSUMER = 0
SURPLUS
IMPERFECT PRICE DISCRIMINATION
PERFECT
COMPETITION
MONOPOLY
X USES
IMPERFECT
PRICE DISCRIMINATION
PRICE DISCRIMINATION
MARKET
USES 
MARKET
MARKET
CONSUMER
SURPLUS
P
P
CONSUMER
SURPLUS
P
DEADWEIGHT
SOCIAL
LOSS
SM
PMONO
PP.C.
P1
MONO
PRODUCER
SURPLUS
PP.C.
DM
DM
Q
QP.C.
SM
P2MONO
PP.C.
DM
PRODUCER
SURPLUS
SM
PRODUCER
SURPLUS
QMONO
QP.C.
MRMONOPOLY
THE MONOPOLY
CHARGES 2 PRICES
P1MONO
P2MONO
TO 2 GROUPS OF
CONSUMER
Q
Q
QP.C.
ASSUMPTIONS
MONOPOLISTIC
COMPETITION
1. MANY FIRMS IN THE INDUSTRY ALL
PRODUCING THE SAME BASIC PRODUCT
PRICE/OUTPUT DECISION UNDER
MONOPOLISTIC COMPETITION
SHORT-RUN
P
EQUILIBRIUM
MC
ATC
2. PRODUCT DIFFERENTIATION:
MANY REAL OR IMAGINED DIFFERENCES
IN PRODUCT
ECONOMIC
PROFIT
= C1P1LM
L
P1
M
MR1
3. EACH FIRM MAKES ITS DECISIONS
INDEPENDENTLY OF ALL OTHERS
MONOPOLISTIC COMPETITION
MANY SELLERS: NO ONE OF THEM IMPORTANT
ENOUGH TO BE ABLE TO INFLUENCE ANY
OTHER SELLER
EACH SELLER’S PRODUCT DIFFERENTIATED
FROM THAT OF THE OTHERS
SOME CAUSES FOR PRODUCT
DIFFERENTIATION
1. PRODUCT DESIGN, COLOUR
P
ATC
2. QUALITY OF SERVICE OFFERED BY SELLERS,
COURTESY, SELIVERY SERVICE
3. ADVERTISEMENT
P2 = ATC
P2
ECONOMIC
PROFIT
=0
MR2
Q
MONOPOLISTIC COMPETITION
A BLENDING OF COMPETITION & MONOPOLY
2. LESS ELASTIC THAN
THAT OF A COMPETITIVE
FIRM
THE MONOPOLY ASPECT OF MONOPOLISTIC
COMPETITION IS OBSERVED IN THE SHORT RUN
THE COMPETITION ASPECT OF MONOPOLISTIC
COMPETITION IS OBSERVED IN THE LONG RUN
Q
COMPARISON BETWEEN DP & DM
P2
P1
D2
1. DOWNWARD SLOPING
D
P
Q
PRICE/OUTPUT DECISION UNDER
MONOPOLISTIC COMPETITION
LONG-RUN
P
EQUILIBRIUM
MC
4. TRADE MARK & BRAND NAME
FIRM’S DEMAND CURVE
D1
C1
DP – DEMAND CURVE OF A
PERFECTLY COMPETITIVE
FIRM
DM – DEMAND CURVE OF
DP A MONOPOLISTICALLY
DM COMPETITIVE FIRM
Q
HOW TO CALCULATE A FIRM’S PROFIT?
WHAT HAPPENS WHEN EXISTING FIRMS ARE MAKING (+) ECONOMIC PROFIT? FREE ENTRY
g consumers
Consumer 1
……
MARKET
P
Consumer g
……
Firm 1
SM
P
P
h firms
P
Firm h
MC
P
ATC
P1
PP.C.
D1
D
Dg
DM
Q
P1
D1
Q
P1
Dg
Q
D’
Q
Q
QP.C .
MR
MR’
OUTPUT?
HOW TO SETERMINE A FIRM’S PROFIT-MAXIMISING
PRICE?
Q