learn economics its really good. in this slide you will know about competitive and monopoly market

1. Theory of Market:
Perfectly
Competitive &
Monopoly
© 2002 by Nelson, a division of Thomson Canada Limited

2. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 2
• Learn what characteristics make a market
competitive.
• Examine how competitive firms decide
how much output to produce.
• Examine how a monopoly operates.
• Examine how monopoly and perfectly
competitive markets vary in functions.
In this chapter you will…

3. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 3
• A perfectly competitive market has
the following characteristics:
–There are many buyers and sellers
in the market.
–The goods offered by the various
sellers are largely the same.
–Firms can freely enter or exit the
market.
WHAT IS A COMPETITIVE
MARKET

4. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 4
• A competitive market has many
buyers and sellers trading identical
products so that each buyer and
seller is a price taker.
–Buyers and sellers must accept the
price determined by the market.
WHAT IS A COMPETITIVE
MARKET

5. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 5
• Total revenue for a firm is the selling
price times the quantity sold.
TR = (P  Q)
• Total revenue is proportional to the
amount of output.
• Average revenue tells us how much
revenue a firm receives for the typical unit
sold.
• Average revenue is total revenue divided
by the quantity sold.
The Revenue of a Competitive
Firm

6. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 6
• In perfect competition, average revenue
equals the price of the good.
The Revenue of a Competitive
Firm
Average Revenue =
Total revenue
Quantity
Price Quantity
Quantity
Price




7. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 7
• Marginal revenue is the change in
total revenue from an additional unit
sold.
• For competitive firms, marginal
revenue equals the price of the good.
The Revenue of a Competitive
Firm
MR =TR/ Q

8. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 8
Table 14-1: Total, Average, and Marginal
Revenue for a Competitive Firm
6
64868
6
64267
6
63666
6
63065
6
62464
6
61863
$ 6
61262
$ 6$ 6$ 61
(MR = ∆TR/∆Q)(AR = TR/ Q)(TR = P x Q)(P)(Q)
Marginal
Revenue
Average
Revenue
Total
RevenuePrice
Quantity
(in litres)

9. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 9
• The goal of a competitive firm is to
maximize profit, which equals total
revenue minus total cost.
• This means that the firm will want to
produce the quantity that maximizes
the difference between total revenue
and total cost.
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE

10. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 10
• Profit maximization occurs at the
quantity where marginal revenue
equals marginal cost.
• When MR > MC  increase Q
• When MR < MC  decrease Q
• When MR = MC  Profit is
maximized.
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE

11. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 11
Costs
and
Revenue
Quantity
0
MC1
Q1
The firm maximizes
profit by producing
the quantity at which
marginal cost equals
marginal revenue.
MC
AVC
Q MAX
MC2
Q 2
P = MR1 = MR2 P = AR = MR
ATC
Figure 14-1: Profit Maximization for a
Competitive Firm

12. Monopoly
• While a competitive firm is a
price taker, a monopoly firm is a
price maker.
• A firm is considered a monopoly if . .
.
–it is the sole seller of its product.
–its product does not have close
substitutes.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 12

13. Why Monopolies arise?
• The fundamental cause of
monopoly is barriers to entry.
• Barriers to entry have three sources:
– Ownership of a key resource.
– The government gives a single firm the
exclusive right to produce some good.
– Costs of production make a single
producer more efficient than a large
number of producers.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 13

14. Profit maximization
• A monopoly maximizes profit by
producing the quantity at which marginal
revenue equals marginal cost.
• It then uses the demand curve to find the
price that will induce consumers to buy
that quantity.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 14

15. Profit maximization
• Comparing Monopoly and Competition
– For a competitive firm, price equals
marginal cost.
P = MR = MC
– For a monopoly firm, price exceeds
marginal cost.
P > MR = MC
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 15

16. Monopoly profit in diagram
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 16

17. A market for drugs
• A new drug discovery gives rise to a
patent and gives the firm a monopoly on
the sale of that drug.
• When the patent expires and any company
can make or sell the drug.
• The market switches from being
monopolistic to being competitive.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 17

18. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 14: Page 18
THE END