In this slides deck, you will understand
Competitive Market and Monopoly.
With worksheet, you could write by your hand and understand the concept of basic market theory.
4. Perfect Competition
โข Firms are price taker
โข Firms have no power to
decide the price to sell.
โข Both buyers and sellers
have complete
information about price,
costs,โฆ
โข Firms are selling
identical(homogeneous)
products.
5. Competitive market
๐
๐
๐ ๐ + 1
๐1
๐ด ๐ต
Demand curve = uniform price in every quantity.
Consumers in perfect Competitive market is
Perfect price elastic. Because if you charge $1 more,
No one buy from you.
6. Short-run
What is Short-run?
In short run,
- no entry, no exit
- k(capital) = fixed. (You cannot build new plants)
So, companies could change only quantity ๐
(We use ๐ as individual firm and ๐ for market)
7. Company aims maximize their profit.
What is Economic profit(๐)?
Profit is Total Revenue โ Total (opportunity) Cost
๐ ๐ = ๐๐ ๐ โ ๐๐ถ ๐
In Economics, cost is excluding sunk cost
(sunk cost do not always equals to fixed cost)
Total Revenue is Price ร quantity, so:
๐๐ ๐ = ๐๐
Do you draw โRevenueโ graph properly?
12. Marginal โ the key concept of economics.
ฮ๐
ฮ๐
, ๐๐
๐๐
๐๐
๐
๐
๐ ๐ + 1
ฮ๐
๐(๐)
๐(๐ + 1)
ฮ๐
If I change quantity, how X changes?
13. Why Marginal is important?
๐๐ถ < ๐๐
We can decide change quantity or not.
If ๐๐๐๐๐๐๐๐ ๐ถ๐๐ ๐ก < ๐๐๐๐๐๐๐๐ ๐ ๐๐ฃ๐๐๐ข๐,
We should produce more.
While ๐๐๐๐๐๐๐๐ ๐ถ๐๐ ๐ก > ๐๐๐๐๐๐๐๐ ๐ ๐๐ฃ๐๐๐ข๐,
We shouldnโt produce more.
So, in general, when MC = MR, ๐ ๐๐๐ฅ
Do you draw โMRโ graph?
๐๐ถ > ๐๐
14. ๐๐๐๐๐ = 50, ๐น๐๐ฅ๐๐ ๐ถ๐๐ ๐ก = 100, ๐๐๐๐๐๐๐๐๐ถ๐๐ ๐ก = 50๐ โ 11๐2
+ ๐3
0
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Revenue MR
๐๐ ๐๐๐๐๐๐๐๐ ๐ ๐๐ฃ๐๐๐ข๐ =
๐๐๐
๐๐
=
๐(๐ ร ๐)
๐๐
= ๐๐๐๐๐
๐๐ = ๐ก๐๐๐๐๐๐ก ๐๐ ๐๐
๐
In Competitive Market, firms are price taker
So, ๐๐ = ๐๐๐๐๐.
Which means,
consumers are perfectly price elastic( ๐ = โ).
Why?
If you charge $1 more in competitive market,
Consumers buy things from another firm.
Remember Amazon Market Place.
Remember, Marginal is: if I change
quantity, how X is changed.
So, if you sell +1,
you got +P revenue.
36. Download and Check Excel
โข https://www.dropbox.com/s/7w91ks1jiyvrprz/eshipVC3%20-
%20forhandout.xlsx?dl=0
โข Sheet Competitive Market
โข In group 3-5 ppl, letโs share your finding in 3-5min.
40. Imagine, suddenly the price drops ๐ = $26.
(1) How many you should produce?
๐๐ถ = ๐, so 50 โ 22๐ + 3๐2 = 26 โ ๐ = ๐
(2) What is your revenue?
๐๐ = ๐ ร ๐ = $26 ร 6 = $๐๐6
(3) What is your profit?
๐ = ๐๐ โ ๐๐ถ = $156 โ 100 + 50๐ โ 11๐2 + ๐3 = $156 โ $220 = โ$๐๐
You lose money.
(4)Should you shut down?
No. because ๐ด๐๐ถ(๐ = 6) = 50 โ 11๐ + ๐2 = $20 and ๐ = $26 > ๐ด๐๐ถ(๐ = 6)
(5) if you compare the profit with ๐ = 0 and ๐ = 5,7 what do you think?
41. Imagine, suddenly the price drops ๐ = $26.
(1) How many you should produce?
๐๐ถ = ๐, so 50 โ 22๐ + 3๐2 = 26 โ ๐ = ๐
(2) What is your revenue?
๐๐ = ๐ ร ๐ = $26 ร 6 = $๐๐6
(3) What is your profit?
๐ = ๐๐ โ ๐๐ถ = $156 โ 100 + 50๐ โ 11๐2 + ๐3 = $156 โ $220 = โ$๐๐
You lose money.
(4)Should you shut down?
No. because ๐ด๐๐ถ(๐ = 6) = 50 โ 11๐ + ๐2 = $20 and ๐ = $26 > ๐ด๐๐ถ(๐ = 6)
(5) if you compare the profit with ๐ = 0 and ๐ = 5 what do you think?
If ๐ = 0, T๐ = $26 ร 0 = 0, so ๐ = ๐๐ โ ๐๐ถ = 0 โ ๐๐ถ = โ$๐๐๐
If ๐ = 5, T๐ = $26 ร 5 = 130, so ๐ = ๐๐ โ ๐๐ถ = 130 โ (100 + 50๐ โ 11๐2
+ ๐3
) = โ$๐๐
If ๐ = 7, T๐ = $26 ร 7 = 182, so ๐ = ๐๐ โ ๐๐ถ = 182 โ (100 + 50๐ โ 11๐2 + ๐3) = โ$๐๐
So, if we produce ๐ = 6, we lose money $64, But this is still better off than other quantity.
This is why we should not shut down if ๐ท > ๐จ๐ฝ๐ช(๐๐๐๐๐ ๐๐๐ ๐๐๐๐)
๐๐๐๐๐๐ ๐๐๐๐ ๐ ๐ ๐๐๐๐๐๐๐!
42. Individual firm and market supply
Q=1 Q=2 Q=3 Q=4
David 40 50 80 100
Joe - 40 50 80
Imagine, there are only two producers in the world.
And they could produce following Marginal
Cost(=individual supply curve)
Could you draw a individual supply curve?
๐
๐
$100
80
50
40
1 2 3 4 5 6 7 8
๐
$100
80
50
40
1 2 3 4
๐
individual
Worksheet 5
43. ๐
$100
80
50
40
1 2 3 4
๐
Individual firm and market supply
MC Q=1 Q=2 Q=3 Q=4
David 40 50 80 100
Joe - 40 50 80
Imagine, there are only two producers in the world.
And they could produce following Marginal
Cost(=individual supply curve)
Could you draw a Market supply curve?
๐
๐
$100
80
50
40
1 2 3 4 5 6 7 8
Market
individual
44. ๐
$100
80
50
40
1 2 3 4
๐
Individual firm and market supply
Q=1 Q=2 Q=3 Q=4
David 40 50 80 100
Joe - 40 50 80
Imagine, there are only two producers in the world.
And they could produce following Marginal
Cost(=individual supply curve)
Could you draw a Market supply curve?
๐
๐
$100
80
50
40
1 2 3 4 5 6 7 8
1 + 2 = 3
3 + 4 = 7
2 + 3 = 5
Market
Just horizontal (where same price) sum over the quantity!
51. Short Run: Shut down condition
๐๐๐๐๐ < ๐ด๐๐ถ(๐ด๐ฃ๐๐๐๐๐ ๐๐๐๐๐๐๐๐ ๐ถ๐๐ ๐ก)
Long Run: Shut down condition
๐๐๐๐๐ < ๐ด๐ฃ๐๐๐๐๐ ๐ถ๐๐ ๐ก
Because there are no fixed cost in the long run.
(sell and buy fixed asset in the long run)
52. Long Run: There are entry and exit
In competitive market, in the long run,
it drives profit to zero.
Cite: https://courses.edx.org/courses/course-v1:MITx+14.100x+3T2016/courseware/65ca1e8e024b4e0aae5d764b31942021/510230ecf173432786c678ab0591cf5d/?activate_block_id=block-
v1%3AMITx%2B14.100x%2B3T2016%2Btype%40sequential%2Bblock%40510230ecf173432786c678ab0591cf5d
If firms making profit,
Another company will
enter into the market in
the long run. So the
supply curve become
flatten(๐๐ 1 โ ๐๐ 2).
The Price will decrease
(๐1 โ ๐2)
And Individual firm lose
quantity(๐1 โ ๐2)
53. Long Run: There are entry and exit
In competitive market, in the long run,
it drives profit to zero.
Cite: https://courses.edx.org/courses/course-v1:MITx+14.100x+3T2016/courseware/65ca1e8e024b4e0aae5d764b31942021/510230ecf173432786c678ab0591cf5d/?activate_block_id=block-
v1%3AMITx%2B14.100x%2B3T2016%2Btype%40sequential%2Bblock%40510230ecf173432786c678ab0591cf5d
๐๐ 3
๐3๐3
๐3 = 0
More entry till the
profit=0
This point is most
efficient to produce
because ATC is MIN.
54. Short Run Cost VS Long Run Cost
In the short run, your Average Total Cost is like this:
Heavy fixed cost Over Capacity
- Overtime rate charge
- Diminishing Productivity
Your work is digging a hole.
Your company has only 1 scoop.
Due to high demand, your firm
decide to hire +1 worker.
But there are no scoop.
55. Short Run Cost VS Long Run Cost
In the Long run, your firm could build new plant
Because you could use Capital(K)
Huge plant needs
More cost at first.
They are more productive.
But still have limitation.
56. Short Run Cost VS Long Run Cost
If we made 3 plants in the long run, our cost curve is
Yellow dotted line.
57. Short Run Cost VS Long Run Cost
But in the long run, managers could decide build a plant with target
quantity in every K(capital) level.
Which means there are infinite option. So the Yellow dotted line is
LRMC.
In general this is more efficient (low price same quantity) for firms
than SRMC.
59. Monopolistic Market
โข Government sometimes allows monopoly
to infrastructure companies.
โข Ex: Electric Power Company, Telecom
Company, Post Office,โฆ
โข Only one seller and many buyers.
โข No close substitutes
โข Barriers to entry
โข Monopolistic Company is Price Maker.
60. Monopolistic Market
The firm is price maker, but they are not almighty.
Because consumers could react. If you set $100 for an ordinal candy,
no one want to buy it so company couldnโt make profit.
โข ๐ = ๐๐ โ ๐๐ถ
โข
๐๐
๐๐
= ๐๐ โ ๐๐ถ = 0 โ ๐ ๐๐๐ฅ
โข This when ๐ ๐๐๐ฅ โ ๐๐ = ๐๐ถ rule is still same as monopoly.
61. Competitive market VS Monopolistic Market
๐
๐
๐ ๐ + 1
๐1
๐ด ๐ต
Demand curve
Consumers in Competitive market is
Perfect price elastic.
So, ๐๐ = ๐1 (๐ + 1) โ ๐ = ๐ต
๐
๐
Q ๐ + 1
๐1
๐ด ๐ต
Demand curve
๐ถ
๐2
Consumers in Monopolistic market is
moderate price elastic.
So, ๐๐ =
ฮ๐
ฮ๐
=
(๐2 ๐+1 โ๐1 ๐)
๐+1 โ๐
= ๐ต โ ๐ถ
So, monopolist lose revenue sometimes when they produce and sell more.
62. Monopolistic Market Example
โข Demand Curve is ๐ ๐ท ๐ = 20 โ ๐
(1)What is MR for monopolist?
(2)Draw MR and Demand Curve
๐
๐
20
20
10
10
Worksheet 6
63. Monopolistic Market Example
โข Demand Curve is ๐ ๐ท ๐ : ๐ = 20 โ ๐
โ ๐ = 20 โ ๐
โข ๐๐ = ๐๐
โข ๐๐ =
๐๐๐
๐๐
you can rewrite it if you like: (= ๐ + ๐
๐๐
๐๐
)
โข here, we differentiate by Q. so, we would like
to re-write TR by TR(Q)
โข ๐๐ = ๐๐ = 20 โ ๐ ร ๐ = 20๐ โ ๐2
โข ๐๐ =
๐๐๐
๐๐
=
๐(20๐โ๐2)
๐๐
= 20 โ 2๐
๐
๐
20
Demand curve
20
10
10
MR
Worksheet 6
64. [advanced] Monopolistic and competitive
โข ๐๐ =
๐๐๐
๐๐
you can rewrite it if you like: (= ๐ + ๐
๐๐
๐๐
)
โข ๐๐ =
๐๐๐
๐๐
= ๐ + ๐
๐๐
๐๐
If competitive market,
This term is 0
So, ๐๐ = ๐
Worksheet 6
65. [advanced] Monopolistic and competitive
โข In addition to that, we know
Elasticity ๐ =
ฮ๐/๐
ฮ๐/๐
=
P
Q
ฮQ
ฮP
So, transform MR to this form:
โข ๐๐ =
๐๐๐
๐๐
= ๐ + ๐
๐๐
๐๐
= ๐ + ๐
๐
๐
๐๐
๐๐
โข = ๐ + ๐
๐
๐
๐๐
๐๐
โข This is
1
๐
so, ๐ด๐น = ๐ท(๐ +
๐
๐
)
โข And if ๐ โ โ(Competitive Market),
1
๐
โ 0 ๐ ๐ ๐๐ โ ๐
66. Monopolistic Market
The firm is price maker, but they are not almighty.
Because consumers could react. If you set $100 for an ordinal candy,
no one want to buy it so company couldnโt make profit.
โข ๐ = ๐๐ โ ๐๐ถ
โข
๐๐
๐๐
= ๐๐ โ ๐๐ถ = 0 โ ๐ ๐๐๐ฅ
โข ๐ ๐๐๐ โ ๐ด๐น = ๐ด๐ช rule is still same as monopoly.
67. Monopolistic Market Example
โข Demand Curve is ๐ ๐ท ๐ : ๐ = 20 โ ๐
โ ๐ = 20 โ ๐
โข We know
โข ๐๐ =
๐๐๐
๐๐
=
๐(20๐โ๐2)
๐๐
= 20 โ 2๐
So, If Cost function is ๐๐ = ๐ + ๐ธ ๐
โข A monopolist will supply what quantity at
what price?
๐
๐
20
Demand curve
20
10
10
MR
Worksheet 6-2
80. Download and Check Excel
โข https://www.dropbox.com/s/7w91ks1jiyvrprz/eshipVC3%20-
%20forhandout.xlsx?dl=0
(same excel as before)
โข Sheet Monopoly
โข In group 3-5 ppl, letโs share your finding in 3-5min.
81. Problem solving procedure.
For Competitive Market For Monopoly Market
Step1: Find out optimal quantity, which means find ๐ ๐๐๐ก where profit ๐ ๐ ๐๐๐ก = ๐๐๐ฅ.
โข ๐ ๐๐๐ก is where Marginal Revenue equals to Marginal Cost. Which is ๐๐ = ๐๐ถ
โข ๐๐ถ =
๐๐๐ถ
๐๐
=
๐๐๐ถ
๐๐
, where TC=Total Cost, VC=Variable Cost.
๐๐ = ๐(price)
To know ๐๐ =
๐๐๐
๐๐
, We should calculate T๐ = ๐ ร Q
We know Demand Curve ๐ ๐ = ๐ โ ๐๐ธ (or ๐2
or something)
To differentiate by ๐, we use ๐ โ ๐๐ธ as ๐ to earn TR.
So T๐ = ๐ ร Q = ๐ โ ๐๐ธ ร ๐ = ๐๐ โ ๐๐2, so weโll have MR.
Solve ๐๐ = ๐๐ถ, we got optimal ๐ ๐๐๐ก
Step2: Find out optimal Total Revenue(TR), Total Cost(TC), and Profit (๐).
First of all, we need Price ๐.
We already know Price ๐
Find out ๐๐๐๐ก using Demand Curve.
Assign ๐ ๐๐๐ก to ๐ ๐ = ๐ โ ๐๐ธ, we got ๐๐๐๐ก
Using ๐๐ ๐๐๐ก = ๐๐๐๐ก ร Qopt, ๐๐ถ ๐๐๐ก = ๐๐ถ(Qopt), we get TR and TC.
To know TC, we could use Average Total Cost ๐ด๐๐ถ. ๐ด๐๐ถ ๐ ๐๐๐ก ร ๐ ๐๐๐ก = ๐๐ถ ๐๐๐ก
๐ ๐ ๐๐๐ก = ๐๐ ๐๐๐ก โ ๐๐ถ ๐๐๐ก.
82. If you want to know more, check Entrepreneurial Economics #1
โข https://www.slideshare.net/ryouen/170902-entrepreneurial-
economics-v4-80086316
โข Covered:
โข Price Elasticity
โข Demand / Supply curve shift
โข Welfare and Deadweight Loss
โข Marginal Rate of Substitute and indifference curve
83. Reference
NUS MBA BMA5001 Lecture Note 3, 6, 7
Principles of Microeconomics (Mankiw's Principles of Economics)
MITx: 14.100x Microeconomics
https://en.wikiquote.org/wiki/Greg_Mankiw#Ch._1._Ten_Principles_of_Economics
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