Profitmax

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  • Profitmax

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

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