Graphical Analysis- shows and explains priceand output determination
Short-run Equilibrium of a Firm UnderPure Competition- determined by the intersection of MR and MC curves where MR = MC (or the equilibrium of the competitive firm which is also profit maximization).
Short-run equilibrium of a firm under purecompetition EARNING MC AC If MR = MCP4 and MR > AC PROFIT MR = Price - competitive firm is earning pure profit Most profitable output 80- this graph indicates 80 units at a price of P4 per unit as the most profitable output.
Short-run equilibrium of a firm under purecompetition LOSING MC AC If AC > MR - competitive firm is losingPrice LOSS MR = Price Least loss output Quantity-to minimize the lose the firm should produce an output where Price = MC (or MR = MC)
Long-run Equilibrium of a Firm UnderPure Competition- where MR = MC = AC = price
Long-run equilibrium position of a competitive firm MC AC MR = AC = MC = ACPrice MR Equilibrium point Most profitable output Quantity
Pure Monopoly- Demand for the product of the firm is same as the market demand of product- demand curve is down sloping- Monopolist can only increase his sales by offering a lower unit price for its product
Table 5.2. Demand and revenue schedule of a puremonopolist. QD PRICE TR MR 1 P 50 P 50P 2 45 90 P 40 3 40 120 30 4 35 140 20 5 30 150 10 6 25 150 0 7 20 140 - 10
D, MR, TR of an imperfect type of marketstructure like the monopolist. - More units are sold at a lower price TR - TR increases at a decreasing rate and then declines after reaching itsPrice maximum - MR is always lower than the price - At a lower price, additional income is lower than the D previous additional income Units MR
Profit Maximizing and Loss Minimizing Positions of a Pure Monopolist
Profit maximization under the pure monopoly P MC AC Price > AC - Pure Monopolist enjoys a Monopoly Profit monopoly profit because there are no D (or price curve) competitors MC = MR Most Profitable Output O Q units MR
Loss minimization under the pure monopoly MR P AC Price < AC MC Loss D (or price curve) Least loss output MC = MR O Q units
Short-run Profits/Loss and Long Run Equilibrium under Monopolistic Competition- Demand curve is highly elastic (but notperfectly elastic) because of the presenceof relatively large number of competitorsselling close substitute products.
Short-run profit MC SHORT-RUN PROFIT AC - Maximize its P profits at an output (units) Profit indicated by theAC D intersection of MC and MR - Attract more firms to enter the market MR O Q
Short-run loss LONG-RUN PROFIT MC - Minimize its losses at an output AC (units) indicated P by the intersection Loss of MC and MR AC D MR O Q
Long-run equilibrium AC MC LONG-RUN EQUILIBRIUM - Firms just earnP = AC normal profits which is break-even - This means TR = TC D MR O Q
Various Market Situations Facing a Firm Under Oligopoly-When a firm reduces its price, the otherones also reduces their prices “PRICEWAR”
(a) The demand curve of a firm which increases itsprice without reaction from rivals P D O Q
(b) The demand curve under non-collusiveoligopoly. If the price cut (P2) is ignored by rivals, the P firm can sell up to Q3. a But if rivals also match P1 the price cut, then the firm can only sell up to P2 Q2. D D1 O Q Q1 Q2 Q3
(c) Price reduction PRICE REDUCTION P from the current market price does not only twist(kink) the demand curve but also the MR curve which is a P1 vertical twist. D MR O Q Q1
(d) The equilibrium price under non-collusiveoligopoly - The most profitable P output is Q1 and remains the most profitable output. - The most profitable MC price is P1. Any shift P1 in MC within the vertical segment of MR does not change either price or output D O Q Q1 MR
(e) Profit maximization of a firm under collusiveoligopoly Oligopolists agree P together with respect MC to both price and production in order to gain maximum profits. AC P1 Economic Profit D MR O Q Q1