Microeconomics

PART 3 MJ. QUINTINO

TOPICS
Optimization and Markets
Pure Competition
Firms With “Market Power”
Monopoly
Oligopolistic Competition
Monopolistic Competition
Optimization
and Markets
 A market is a set of buyers and sellers whose

What is a
interaction determines the price of the good or
service.

Market? A market is any organization whereby buyers and

sellers of goods are kept in close touch with each
other.
i. consumers
ii. sellers
iii. commodity
iv. a price
Market
 Since every economic activity is measured as
per price, it is important to know the concepts
and theories related to pricing under various
market forms.
Other examples include the illegal markets,
auction markets, and financial markets.
4 MARKET STRUCTURES
Pure (or perfect) competition

Monopolistic (or imperfect) competition

Oligopolistic competition

Monopoly
 Pure (or perfect)
competition
- Characterized by a complete absence of
rivalry among individual firms
- In practice, businessman use the word
competition as synonymous to rivalry. In
theory, perfect competition implies no
rivalry among firms.
 Ø Large number of seller and buyer
Ø Homogenous Products
Assumptions
ØEasy entry or Exit
on Perfect
Competition ØPerfect information
Ø No Market Power - prevailing market
value dictates the products’ prices.
“Price Taker”
Profit Maximization in a Perfectly
Competitive Market
A perfectly competitive firm
A perfectly competitive firm the perfectly competitive firm
must accept the price for its
has only one major decision can choose to sell any
output as determined by the
to make—namely, what quantity of output at exactly
product’s market demand and
quantity to produce the same price
supply, can’t change price

Therefore, the firm faces a

perfectly elastic demand When the firm chooses what
curve for its product: quantity to produce, the
• buyers are willing to buy any quantity will determine the
number of units of output from the firm’s total revenue, total
firm at the market price costs, and level of profits
 Market Condition of a Perfect
Competition
Diagram for perfect competition
 The demand curve is a normal
downward sloping demand curve
showing that for the industry as a
whole quantity demanded increases
as price falls.

 A perfectly competitive firm faces a

horizontal demand curve at the
market price
 If a higher price is charged, customers would
know immediately that a lower price is available
Market elsewhere, and that the product for sale at the
Condition of lower price is a perfect substitute for the more
expensive product.
a Perfect
Competition
At a price lower than P the firm would not
maximize its profit.
 Short Run Analysis of
a Perfect Competition
The best level of output of the firm in the short run is
the one at which the firm maximizes profits or
minimizes losses.

This is possible when the marginal revenue (MR) of

the firm equals its short run marginal cost (MC). MR =
MC

 MR > MC, expand output because IT would add more to

its total revenue than to its total costs.
 if MR <MC, reduce output because by doing so the firm
will reduce its total cost more than its total revenue.
 Long Run
Analysis of a
Perfect
Competition

In the longrun, all inputs

and costs of production are
variable and the firm can
construct the optimum or most
appropriate scale of plant to
produce the best level of output

The best level of output is one

at which price P=LMC equals
the long run marginal cost (IMC)
of the firm
  A firm can not avoid losses by shutting down
and not producing because shutting down can
reduce variable costs to zero
Shutdown  In the short run, however, the firm has already
committed to pay its fixed costs
Decision  As long as a firm's total revenue is covering its
total variable cost, temporarily producing at a
loss is the firm's best strategy because it is
making less of a loss than it would make if it
were to shut down.
Consider the situation of the Yoga Center, which has signed a year contract
to rent space that costs P10,000 per month. The firm decided to operate, its
marginal costs for hiring yoga teachers is P15,000 for the month.
Should the Yoga Center Shut Down Now or Later?

Scenario 1: If Yoga Center does Scenario 2: The center earns Scenario 3: The center earns
not have any client, they shuts revenues of P12,000, and revenues of P20,000, variable
down now variable costs are P15,000. costs are P15,000.

profit = TR – (FC + VC) profit = TR – (FC + VC) profit = TR – (FC + VC)

= 0 – (P10,000 + VC) =P12,000– (10,000+15,000) = P20,000– (P10,000+15,000)
= (P10,000) = (P13,000) = (P5,000)

The center should shut The center should shut The center should
down now down now. continue in business.
MONOPOLY
Monopoly is said to exist when one firm is
the sole producer or seller of a product
which has no close substitutes.

ex. Zameco, water district

 1. One and only one firm produces and sells a
The particular commodity or a service.

following 2. There are no rivals or direct competitors of the

firm.
conditions 3. No other seller can enter the market for whatever
are reasons - legal, technical or economic.

essential 4. Monopolist is a price maker.

Market
Conditions in
Monopoly
Since a normal demand curve is
assumed, it is necessary for the
monopolist to reduce price in order
to increase the quantity sold.
 Sources of Monopoly
 Legal Restrictions
- Some public sector services are statutory monopolies
- may also be protected by patent
Capital Costs
 Certain businesses, such as international airlines and chemical
companies, have relatively high set-up costs
 Natural Factor Endowment
 Tariffs and Quotas
Restrictive Practices
Restrictive practices are practices that do not involve outright agreements to raise price
or to reduce the quantity produced, but might have the effect of reducing competition
Types of restrictive practices are:
◦ A minimum resale price maintenance agreement
◦ An exclusive dealing
◦ Bundling
◦ Predatory pricing
OLIGOPOLY
Oligopoly is a situation in which only a
few firms (sellers) are competing in the
market for a particular commodity
 Few but large firms dominated
the market

Characteristics
Barriers to Entry – high, new
entry is difficult

Non-Price Competition - Firms

of Oligopolistic try to avoid price competition,

depends on non-price methods

Competition
like advertising, after sales
services, warranties, etc.

Interdependence - each firm is

affected by the price and output
decisions of rival firms
 1. Product Differentiation - a firm may have
convinced consumers that its product is significantly
better than the product of new entrants.
Barriers to 2. Control inputs of existing suppliers

Entry 3. Legal Restriction

4. Scale Economies - existing companies have the
advantage of expanding more due to its industry
standing.
Collusion or Competition
Collusion - firms work together to reduce output
and keep prices high
Price leadership - sets the price of goods or
services in its market.
Cartel - group of firms that have a formal
agreement to collude to produce the monopoly
output and sell at the monopoly price
Monopolistic Competition
- is a market in which there are large
number of firms and the products in the
market are close but not perfect
substitute.
- Product is seen as ‘unique’ for some
customers
- differentiated brand provides the firm
with some control over pricing vs
competition
 1. There are a large number of independent
sellers (and buyers) in the market.
Characteristics 2. The relative (proportionate) market shares
of all sellers are insignificant and more or less
of a equal.
monopolistic 3. There are neither any legal nor any
economic barriers against the entry of new
competition firms into the market. New firms are free to
enter the market and existing firms are free to
leave the market.
Product differentiation
Product differentiation is any action that firms do to make consumers think their products are different
from their competitors’ (i.e. brands)

The variety of styles, flavors, locations, and characteristics creates product differentiation and
monopolistic competition

Product differentiation is based on variety and innovation

Perceived Demand for a
Monopolistic Competitor

The demand curve as faced by a

monopolistic competitor is not flat,
but rather downward-sloping

This means that the monopolistic

competitor can raise its price without
losing all of its customers or lower
the price
4 basic types of Summary
markets
End of
Report
MICROECONOMICS