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Profit Maximisation under Perfect Competition and Monopoly

Alternative Market Structures ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Alternative Market Structures ,[object Object],[object Object],[object Object],[object Object],[object Object]

Features of the four market structures

Alternative Market Structures ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Perfect Competition ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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

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

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

Perfect Competition ,[object Object],[object Object],[object Object],[object Object],[object Object]

Perfect Competition ,[object Object],[object Object],[object Object]

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

Perfect Competition ,[object Object],[object Object],[object Object],[object Object]

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

Perfect Competition ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Perfect Competition ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Monopoly ,[object Object],[object Object],[object Object]

Concentration ratios in the UK

Monopoly ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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

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

Monopoly ,[object Object],[object Object]

Profit maximising under monopoly £ Q O Q m MR MC

Profit maximising under monopoly £ Q O MC Q m MR AC AR AC AR

Profit maximising under monopoly £ Q O MC AC Q m MR AR AR AC Total profit

Monopoly ,[object Object],[object Object],[object Object],[object Object]

Monopoly ,[object Object],[object Object],[object Object],[object Object],[object Object]

Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ Q O Q 1 P 1 Monopoly AR = D MC MR

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

Monopoly ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Monopoly ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Equilibrium of industry under perfect competition and monopoly: with different MC curves £ Q O Q 1 MR P 1 MC monopoly AR = D

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

Contestable Markets ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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