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    Chapter 4 - Part 1

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    billtan
    This document defines and compares different market structures including perfect competition, monopolistic competition, oligopoly, and monopoly. It provides characteristics of each market structure such as the number of suppliers and products, entry barriers, and level of market power. The document then focuses on perfect competition, outlining its key characteristics like numerous suppliers and consumers, identical products, no entry barriers or market power. It discusses the demand and marginal revenue curves under perfect competition and how firms maximize profits by producing where price equals marginal cost. In the long run, perfect competition leads to zero economic profits as entry and exit of firms causes the market price to equal minimum average total cost.

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    Chapter 4 - Part 1

    Uploaded by

    billtan
    73 views14 pages
    This document defines and compares different market structures including perfect competition, monopolistic competition, oligopoly, and monopoly. It provides characteristics of each market structure such as the number of suppliers and products, entry barriers, and level of market power. The document then focuses on perfect competition, outlining its key characteristics like numerous suppliers and consumers, identical products, no entry barriers or market power. It discusses the demand and marginal revenue curves under perfect competition and how firms maximize profits by producing where price equals marginal cost. In the long run, perfect competition leads to zero economic profits as entry and exit of firms causes the market price to equal minimum average total cost.

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    Microeconomics 1

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    This document defines and compares different market structures including perfect competition, monopolistic competition, oligopoly, and monopoly. It provides characteristics of each market structure such as the number of suppliers and products, entry barriers, and level of market power. The document then focuses on perfect competition, outlining its key characteristics like numerous suppliers and consumers, identical products, no entry barriers or market power. It discusses the demand and marginal revenue curves under perfect competition and how firms maximize profits by producing where price equals marginal cost. In the long run, perfect competition leads to zero economic profits as entry and exit of firms causes the market price to equal minimum average total cost.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    73 views14 pages

    Chapter 4 - Part 1

    Uploaded by

    billtan
    This document defines and compares different market structures including perfect competition, monopolistic competition, oligopoly, and monopoly. It provides characteristics of each market structure such as the number of suppliers and products, entry barriers, and level of market power. The document then focuses on perfect competition, outlining its key characteristics like numerous suppliers and consumers, identical products, no entry barriers or market power. It discusses the demand and marginal revenue curves under perfect competition and how firms maximize profits by producing where price equals marginal cost. In the long run, perfect competition leads to zero economic profits as entry and exit of firms causes the market price to equal minimum average total cost.

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    You are on page 1of 14

    Perfect competition

    and monopoly market

    Classification of market

    PERFECT
    COMPETITION

    IMPERFECT
    COMPETITION

    MONOPOLISTIC
    COMPETITION

    MONOPOLY

    OLIGOPOLY

    Classification of market
    structures
    Types of market

    Perfect
    competition

    Monopolistic
    competition

    Oligopoly

    Monopoly

    Unlimited

    Several

    Few

    One

    Identical

    Different

    Identical/
    Different

    Unique

    High

    Very
    high

    Strong

    Very
    strong

    Number of
    suppliers
    Products
    Entry barrier

    Market power

    Non-price
    competition

    None

    Low

    None

    Weak

    None

    Little

    Much

    None

    I. Perfect competition
    1. Definition
    -

    A type of market where products are identical


    and there are unlimited suppliers and
    consumers.

    Examples: Agricultural products ....

    I. Perfect competition
    2. Characteristics
    -

    No entry barrier
    Suppliers are price-taker
    No market power
    Symmetric information
    No non-price competition (no
    advertisement) due to identical inputs
    - Not necessary to choose supplier

    Perfect competition
    3. Demand and
    marginal revenue
    curves
    - Demand curve: parallel
    with horizontal axis
    - Marginal curve:
    coinciding with demand
    curve
    - MR = P

    P =MR
    P*

    Demand curves of a firm and of the whole industry in


    perfect competiition market
    (a) Demand Curve of a firm
    Price

    Price

    (b) Demand Curve of the whole


    industry

    Demand
    Demand

    Quantity of output

    Quantity of output

    Perfect competition
    4. Maximizing profit
    MAX: MR=MC
    In perfect competition: MR =
    P

    MC

    P=MR

    P*

    MAX in perfect competition:

    P=MC

    Q*

    Short run equilibrium

    Perfect competition
    Break-even, shut down point
    = TR TC = Q (P - ATC)
    P> ATCmin > 0 profit
    P= ATCmin = 0 break-even point
    P< ATCmin < 0 loss
     AVCmin< P < ATCmin continue producing
     P < AVCmin shut down

    PERFECT COMPETITION
    5. Producers surplus (PS)

    - Is the sum over all units


    produced of difference
    between market price
    of good and marginal
    cost of production

    P
    MC

    P=MR
    P*

    - The area below price line


    and above marginal cost
    curve
    PS = TR VC
    = + FC

    PS

    Q*

    Producer Surplus for Market


    Price
    ($ per
    unit of
    output)

    Market producer surplus is


    difference between P*
    and S from 0 to Q*.

    P*

    Producer
    Surplus

    D
    Output

    Q*

    11

    6. Competitive Firms
    Short-Run Supply Curve
    Price
    ($ per
    unit)

    Competitive firms supply curve is


    portion of marginal cost curve above
    AVC. Firm chooses output level where
    P = MR = MC, as long as P > AVC.

    MC

    P2

    ATC

    P1

    AVC

    P = AVC

    q1

    q2 Output
    12

    PERFECT COMPETITION
    6. Competitive Firms
    * Short-Run Supply Curve
    Supply is upward sloping due to diminishing
    returns
    Higher price compensates firm for higher cost of
    additional output and increases total profit
    because applies to all units
    How does firms output change in response to
    input price change over time?
    Marginal cost curve shifts, new intersection with
    price
    13

    PERFECT COMPETITION
    Short-Run Market Supply Curve: Shows amount
    of product whole market will produce at given
    prices
    Increased production leads to increased demand

    Sum of supply curves of individual


    producers
    As price rises, firms expand production
    for inputs, increases in input prices
    Input price increases cause MC to rise
    Lowers each firms output choice
    Industry supply to be less responsive to change
    in price than would be otherwise
    14

    Industry Supply in Short Run


    S
    MC1

    $ per
    unit

    MC2

    MC3

    Short-run
    industry supply curve
    is horizontal
    summation of supply
    curves of firms.

    P3

    P2
    P1

    Q
    2

    7 8

    10

    15

    21
    15

    PERFECT COMPETITION
    6. Supply Curve
    Industrys Long-Run supply curve
    Shape of long-run supply curve depends on extent to
    which changes in industry output affect prices firms pay for
    inputs
    Assume:
    All firms have access to available production
    technology
    Output increased by using more inputs, not by invention
    Market for inputs does not change with expansions and
    contractions of industry
    To analyze long-run industry supply, distinguish between
    different types of industries
    16

    Constant-Cost Industry
    Industry whose long-run supply curve is
    horizontal at price equal to minimum average
    cost of production
    Assume firm is initially in equilibrium
    Demand increases, causing price increase
    Individual firms increase supply
    Positive profits in short run

    Supply increases, causing market price to


    decrease
    Long run zero economic profits
    17

    Long-Run Supply in ConstantCost Industry


    $

    Increase in demand increases


    market price and firm output.
    Positive profits cause market
    supply to increase and price to fall.

    MC

    Q1 increases to Q2.
    Long-run supply = SL = LRAC.
    Change in output has no impact on
    input cost.

    S1

    AC

    P2

    P2

    P1

    P1

    S2

    SL

    D1
    q1 q2

    Output

    Q1

    Q2

    D2
    Output
    18

    Increasing-Cost Industry
    Prices of some or all inputs rises as production
    is expanded when demand of inputs increases
    When demand increases, prices increase and
    production increases
    Firms enter market increasing input demand
    Costs increase, causing upward shift in supply
    curves
    Market supply increases but not as much
    In increasing-cost industry, long-run supply
    curve is upward sloping
    More output produced, but only at higher price
    needed to compete for increased input costs
    19

    Long-Run Supply in IncreasingCost Industry


    Due to increase in input prices, long-run
    equilibrium occurs at higher price.

    LMC2

    $
    LMC1

    S1 S2

    LAC2

    LAC1

    P2

    Long run supply is upward


    sloping.

    P2

    P3

    P3

    P1

    P1

    D1
    q1

    q2

    Output

    SL

    Q1 Q2 Q3

    D2
    Output
    20

    10

    Decreasing-Cost Industry
    Industry whose long-run supply curve is
    downward sloping
    Increase in demand causes production to
    increase
    Increase in size allows firm to take advantage
    of size to get inputs cheaper
    Increased production may lead to better
    efficiencies or quantity discounts
    Costs shift down and market price falls
    21

    Long-Run Supply in
    Decreasing-Cost Industry
    $

    Due to decrease
    in input prices, long-run
    equilibrium occurs at
    lower price.

    LMC1

    Long run supply is downward


    sloping.

    S1

    S2

    LMC2LAC

    LAC2 P

    P2
    P1

    P1
    P3

    P3

    SL
    D1

    q1 q2

    Output

    Q1 Q2 Q3

    D2
    Output
    22

    11

    7. Long-Run Competitive
    Equilibrium Profits
    Profit attracts firms
    Supply increases until profit = 0

    $ per
    unit of
    output

    $ per
    unit of
    output

    Firm

    Industry
    S1

    LMC

    $40

    LAC

    P1

    S2

    P2

    $30

    D
    q2

    Q1

    Output

    Q2

    Output
    23

    7. Long-Run Competitive
    Equilibrium Losses
    Losses cause firms to leave
    Supply decreases until profit = 0

    $ per
    unit of
    output

    Firm

    LMC

    $ per
    unit of
    output
    LAC

    $30

    Industry
    S2

    P2

    S1

    P1

    $20

    D
    q2

    Output

    Q2

    Q1

    Output
    24

    12

    7. Long-run equilibrium
    - Happen when:
    - + No new supplier enter the market
    - economic = 0

    - + No existing supplier withdraw from the market


    - accounting > 0

    P=LACmin

    Perfect competition
    7. Long-run
    equilibrium

    P
    LAC

    LMC

    - Enough time for new


    entrants to build factory,
    equip machinery...
    - P more suppliers P
    - P suppliers withdraw
    P

    P1
    A

    P=MR

    P*
    P2

    O
    Q2

    Q*

    Q1

    13

    Summary
    Perfect competition is optimal market
    structure because:
    Under market structure, firms will produce at
    lowest cost
    No super-profit in long-run
    No dead-weight loss optimal social
    welfare

    Exercise
    Good As market demand in a perfect competition
    market is: P = 8260 Q. X an As supplier - has
    long-run total cost: 2
    LTC =

    Q
    + 100Q + 1024
    4

    (Price and cost: USD, quantity: unit)


    a. Calculate the long-run equilibrium for supplier X
    b. Calculate the long-run equilibrium price and quantity for
    industry A
    c. Assume that all suppliers in the industry have the same longrun total cost. How many suppliers are there in this
    industry?

    14

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