Download The competitive market

Institute of Economic Theories - University of Miskolc
Microeconomics
Lecture 7
Supply of a competitive firm
Mónika Kis-Orloczki
Assistant lecturer
Competitive market/pure competition
• Definition: A market where each economic agent
takes the market price as outside of his or her
control.
• Caracteristics of the pure competition:
– Large number of independant consumers and suppliers on
the market non of them are dominant
– Homogeneous products: all firms produce products
satisfying the same needs
– Free entry and exit (no legal or financial obstacles)
– The economic agents on the market are „price-takers”,
market price is determined by the demand and supply on
the market
Price at pure competition
• Price is a given factor for the company in pure competition
• Price is determined by the actors of the market, but one
supplier itself can not change the priceprice-taker
Requirements
• No influence on the price, market price is only determined
by market demand and supply
• Racional economic agents
• Well-informed economic agents
Aim of the competitive firm
• To maximize the difference between the revenue and the
costsprofit-maximization:
πmax
Calculation of profit
Profit: π=TR-TC
• Total revenue (TR= P*Q): The amount received from the
sale of the product
In case of pure competition, the company sells at a fixed
price, so TR is linear
• Total Cost (TC): Fixed costs plus variable costs
•
• Marginal revenue: (
) the extra revenue one
gets from increasing the quantity sold by one unit
• Marginal Cost: (
) the increase in total cost
that results from producing one more unit of output
• Marginal Profit: (Mπ=MR-MC)
Total and marginal revenue
TR
P
MR
MR
AVC=VC/q
AC=TC/Q
Profit-maximisation
• A firm, that is maximising his profit increases the
production until his growing MC reaches the market
price (on the last piece there is no profit at all)
(MC=P) 
• Continues the growing production until the product
that is not causes loss yet.
• In pure competition MR equals with market price
(MR=P)
•
π is maximal if Mπ=0
π
max 
MR=MC=P
Positive Economic Profit
P
MC
P1> ACmin
P1
ACq1
AC
AVC
q1
P1 * q1= TR
ACq1* q1= TC=FC+VC
(P1 -ACq1)* q1=Economic profit
Q
Recovery point (F)
P
MC
AC
P2
AVC
Recovery point (F)
MR
P=ACmin
MC=AC
q2
Q
Recovery point is at P=ACmin , both costs are recovered but
Economic profit=0, the firm realizes normal profit
P2 * q2= TC
Minimizing the loss
P
ACq3
P3
MC
AC
Loss
AVCmin < P3 < ACmin
AVC
AVCq3
q3
ACq3* q3= TC=FC+VC
(ACq3- P3)* q3=Loss
(ACq3- AVCq3)* q3=FC
AVCq3*q3 =VC
Q
Shutdown point (Ü)
P
MC
P4 = AVCmin
ACq4
AC
ACq4* q4= TC
P4 * q4= VC
(ACq4- P4)* q4=Loss
AVC
Loss
P4
q4
Q
•At shutdown point MC=AVC
•The firm can decide to produce or not to produce
•At a price under P4 is not worth procucing, because not even the
variable costs are recovered
Individual supply of the competitive firm
P
MC
AC
AVC
Q
The individual short-run supply curve of a competitive
firm can be found in the increasing part of its Marginal
Cost (MC) function above the intersection point with the
AVC curve, above the shutdown point.
The short-run industry supply
• The industry supply= market supply
• It is the horizontal sum of the individual
supplies of the competitive firms at the
different prices.
• The more actors are on the market, the flatter
the market supply is.
The short-run industry supply
Long-run supply
• Long-run supply is the function of the market price
and the number of producers present on the market
• P= LAC=LMC
• The competitive firms in long-run does not realize
economic profit, only normal profit
• „Little-shop example”
• In long-run the competitive company can not finance
the loss, so does who are realizing losses has to exit
the market
Institute of Economic Theories - University of Miskolc
Microeconomics
Lecture 9
The monopoly
Mónika Kis-Orloczki
Assistant lecturer
Definitions
• Monopoly: A market structure in which the product
is supplied by a single firm. There is only one
supplier, producer in the market. (S)
• Monopolistic competition: A market structure in
which there are many sellers who are supplying
goods that are close but not perfect substitutes of
each other. In such a market each firm can exercise
some effect on its product’s price.
• Monopsony: A market in which there is a single
buyer. (D)
• Oligopoly: A situation of imperfect competition in
which an industry is dominated by a small nnumber
of suppliers.
• In a monopolistic market there is no substitute of
the product, no other products can satisfy the needs
in the same way  The monopolistic company is
‘price-maker’
Demand and Supply on the market
• Demand: inverse ratio between the P and D;
D depends on price, income, needs… but not on the
market position of the firm
• Supply: direct ratio of P and S, but if S increases, the
P decreases; in pure competition supply of 1 firm
does not effect the market price as it is price-taker,
but the monopoly can influence the price
Caracteristics of competitive market and monopoly
• Market:
– Competitive market: lots of buyers and lots of sellers meet
– Monopoly: demand of many buyers meet with the supply
of one single company
• Choice of buyers:
– Competitive market: the buyer can choose from whom to
buy
– Monopoly: no choice as there is only one seller
• TR
– Competitive market: depends on Q only as P is
determined by the market
– Monopoly: depends on Q and on P as well
Total Revenue
Competitive market
Monopoly
TRmax
MR
MR
D
– Competitive market: lots of actors in the market,
firms know neither the market demand curve nor
the total supply
– Monopoly:one seller meets all the market
demand, so the monopolist company knows the
market demand and can adjust its supply to the
demand.
• Monopoly wants to achieve maximum
revenue
Profitmaximization of the monopoly
Recovery point
D and AC has only one common point, it is where MC=MR
Minimizing loss
• The recovery and shutdown point of
monopolies can’t be connected to one
remarkable point or output.
• Recovery point AC=P MC=MR
• Shutdown point AVC=P MC=MR
• There is an endless number of situations
where the firm is operating in its recovery
point and its profit is maximal.
• Long run: the profit of the monopoly can’t be
negative.
Comparison of competitive market and monopoly
1.
2.
3.
4.
πmax
P
TR
S
Competitive market
Monopoly
MC=MR=P
MC=MR≠P
Market D and S
determines  a given
factor by the market
Monopoly can
determine by
determining its own
supply
Depends on Q 
increasing the output
increases the revenue
Depends on P and Q,
increasing the output
causes decrease in P,
TR can even decrease
Part of MC that is above Has no S curve  it is
AVC
only 1 point MC=MR
5.
6.
7.
Market S
Recovery
Point
Shutdown
point
Competitive market
Monopoly
∑MC
MC=MR
P=ACmin
P=AC≠Acmin
and
MC=MR
P=AVCmin
P=AVC≠AVCmin
and
MC=MR
Only one point
Horizontal sum of individual S
S of the firm is the market
curves of the competitive
S as well as there is only 1
firms
supplier, the monopoly
Competitive market
8.
6.
Monopoly
Both companies produce economic
Economic
profit if P>AC, but in a monopolistic
profit
company it is not in ACmin
Equilibrium
D=S
The monopoly
determines the P
according to the
market D where
MC=MR, but the
demand is not
equal with the
supply
Conclusions
• SM < SC and PM > PC
• The loss caused by the lower output and
higher price of the monopoly is called:
welfare loss, efficiency loss or
deadweight loss
Deadweight loss of the monopoly
P
A
SC =∑MC
B
PM
E
C
PC
F
G
MR
QM
QC
D
Q
•Consumers’s surplus (CS)
•CSC= A; E; PC triangle
•CSM= A; B; PM triangle (red)
•Difference is PM ; PC ; B; E trapezium (green and blue)
•The monopoly transforms one part of the difference into
Producers’ surplus (green), the other part is called the
deadweight loss (BCE triangle)
• Deadweight loss: the loss for the society caused by the
lower production and higher price of the monopoly. This
quantity is not even produced by the monopoly so it is an
efficiency loss.