Profitmax
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Profitmax Presentation Transcript

  • 1. Profit Maximisation under Perfect Competition and Monopoly
  • 2. Alternative Market Structures
    • Classifying markets (by degree of competition)
      • number of firms
      • freedom of entry to industry
        • free, restricted or blocked?
      • nature of product
        • homogeneous or differentiated?
      • nature of demand curve
        • degree of control the firm has over price
  • 3. Alternative Market Structures
    • The four market structures
      • perfect competition
      • monopoly
      • monopolistic competition
      • oligopoly
  • 4. Features of the four market structures
  • 5. Features of the four market structures
  • 6. Features of the four market structures
  • 7. Features of the four market structures
  • 8. Features of the four market structures
  • 9. Features of the four market structures
  • 10. Alternative Market Structures
    • The four market structures
      • perfect competition
      • monopoly
      • monopolistic competition
      • oligopoly
    • Structure  conduct  performance
  • 11. Perfect Competition
    • Assumptions
      • firms are price takers
      • freedom of entry of firms to industry
      • identical products
      • perfect knowledge
    • Distinction between short and long run
      • normal profits
      • supernormal profits
  • 12. Perfect Competition
    • Short-run equilibrium of the firm
      • Price
        • given by market demand and supply
      • Output
        • where P = MC
      • Profit
        • ( AR – AC ) × Q
        • possible supernormal profits
  • 13. Short-run equilibrium of industry and firm under perfect competition O £ (b) Firm Q (thousands) O (a) Industry P Q (millions) Q e S D P e MC AR D = AR = MR AC AC
  • 14. Loss minimising under perfect competition O O (a) Industry P £ Q (millions) S D (b) Firm Q (thousands) Q e P 1 D 1 = AR 1 = MR 1 AR 1 MC AC AC
  • 15. Short-run shut-down point O O (a) Industry P £ Q (millions) S (b) Firm MC AC Q (thousands) D 2 P 2 AR 2 D 2 = AR 2 = MR 2 AVC
  • 16. Perfect Competition
    • Short-run equilibrium of the firm (cont.)
      • short-run supply curve of firm
        • the MC curve
    • Short-run supply curve of industry
      • sum of supply curves of firms
  • 17. Perfect Competition
    • The long run
      • long-run equilibrium of the firm
        • all supernormal profits competed away
  • 18. Long-run equilibrium under perfect competition O O P £ Q (millions) Q L Q (thousands) New firms enter Supernormal profits Profits return to normal (a) Industry (b) Firm S 1 D LRAC P L P 1 S e AR 1 D 1 AR L D L
  • 19. Perfect Competition
    • The long run
      • long-run equilibrium of the firm
        • all supernormal profits competed away
        • LRAC = AC = MC = MR = AR
  • 20. Long-run equilibrium of the firm under perfect competition £ Q O (SR)AC (SR)MC LRAC AR = MR D L LRAC = (SR)AC = (SR)MC = MR = AR
  • 21. Perfect Competition
    • The long run
      • long-run equilibrium of the firm
        • all supernormal profits competed away
        • LRAC = AC = MC = MR = AR
      • long-run industry supply curve
  • 22. Perfect Competition
    • The long run
      • long-run equilibrium of the firm
        • all supernormal profits competed away
        • LRAC = AC = MC = MR = AR
      • long-run industry supply curve
      • incompatibility of economies of scale with perfect competition
  • 23. Perfect Competition
    • The long run
      • long-run equilibrium of the firm
        • all supernormal profits competed away
        • LRAC = AC = MC = MR = AR
      • long-run industry supply curve
      • incompatibility of economies of scale with perfect competition
    • Does the firm benefit from operating under perfect competition?
  • 24. Monopoly
    • Defining monopoly
      • importance of market power
      • concentration ratios
  • 25. Concentration ratios in the UK
  • 26. Monopoly
    • Barriers to entry
      • economies of scale
      • product differentiation and brand loyalty
      • lower costs for an established firm
      • ownership/control of key factors or outlets
      • legal protection
      • mergers and takeovers
      • aggressive tactics
  • 27. Monopoly
    • The monopolist's demand curve
      • downward sloping
      • MR below AR
  • 28. AR and MR curves for a monopoly Q (units) 1 2 3 4 5 6 7 P =AR (£) 8 7 6 5 4 3 2 AR AR, MR (£) Quantity
  • 29. AR and MR curves for a monopoly Q (units) 1 2 3 4 5 6 7 P =AR (£) 8 7 6 5 4 3 2 TR (£) 8 14 18 20 20 18 14 MR (£) 6 4 2 0 -2 -4 MR AR, MR (£) Quantity AR
  • 30. Monopoly
    • Equilibrium price and output
      • MC = MR
  • 31. Profit maximising under monopoly £ Q O Q m MR MC
  • 32. Monopoly
    • Equilibrium price and output
      • MC = MR
      • measuring level of supernormal profit
  • 33. Profit maximising under monopoly £ Q O Q m MR MC
  • 34. Profit maximising under monopoly £ Q O MC Q m MR AC AR AC AR
  • 35. Profit maximising under monopoly £ Q O MC AC Q m MR AR AR AC Total profit
  • 36. Monopoly
    • Equilibrium price and output
      • MC = MR
      • measuring level of supernormal profit
    • Monopoly versus perfect competition
  • 37. Monopoly
    • Equilibrium price and output
      • MC = MR
      • measuring level of supernormal profit
    • Monopoly versus perfect competition
      • lower output at a higher price
  • 38. Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ Q O Q 1 P 1 Monopoly AR = D MC MR
  • 39. Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ Q O MC ( = supply under perfect competition) Q 1 MR P 1 Q 2 AR = D Comparison with Perfect competition P 2
  • 40. Monopoly
    • Equilibrium price and output
      • MC = MR
      • measuring level of supernormal profit
    • Monopoly versus perfect competition
      • lower output at a higher price
        • short run and long run
  • 41. Monopoly
    • Equilibrium price and output
      • MC = MR
      • measuring level of supernormal profit
    • Monopoly versus perfect competition
      • lower output at a higher price
        • short run and long run
      • costs under monopoly
  • 42. Equilibrium of industry under perfect competition and monopoly: with different MC curves £ Q O Q 1 MR P 1 MC monopoly AR = D
  • 43. Equilibrium of industry under perfect competition and monopoly: with different MC curves £ Q O MC ( = supply) perfect competition Q 1 MR P 1 P 2 Q 2 MC monopoly AR = D x Q 3 P 3
  • 44. Monopoly
    • Equilibrium price and output
      • MC = MR
      • measuring level of supernormal profit
    • Monopoly versus perfect competition
      • lower output at a higher price
        • short run and long run
      • costs under monopoly
      • innovation and new products
  • 45. Contestable Markets
    • Importance of potential competition
      • low entry costs
      • low exit costs
    • Perfectly contestable markets
    • Contestable markets & natural monopolies
    • The importance of costless exit
      • absence of sunk costs
      • hit-and-run competition
    • Assessment of the theory