The document discusses four market structures: pure competition, pure monopoly, monopolistic competition, and oligopoly. It provides details on the characteristics, pricing, and profit maximization analysis of perfect competition and pure monopoly. An example is given to illustrate the cost structure and profit calculation of a perfectly competitive firm. Market equilibrium is determined by comparing individual firm supply and market demand. [/SUMMARY]
The document discusses key concepts relating to perfect competition, including:
- Firms are price-takers and face perfectly elastic demand in competitive markets
- Profit maximization occurs where marginal revenue equals marginal cost
- In the short-run, a firm may earn profits, losses, or just cover costs
- In the long-run, if profits exist, entry by new firms will increase supply and drive prices down until profits are eliminated
There are 4 main types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. In both the short run and long run, firms will produce where marginal cost equals marginal revenue to maximize profits. The perfectly competitive market leads to productive and allocative efficiency.
This document provides an overview of different market structures, with a focus on perfect competition. It defines key concepts related to revenue, costs, and profit maximization for firms in competitive markets. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. Equilibrium occurs where marginal cost equals marginal revenue. The document also discusses long-run equilibrium and how perfect competition leads to allocative efficiency.
1. The document discusses the characteristics and pricing behavior of perfectly competitive markets. It defines perfect competition and describes its key features.
2. Under perfect competition, firms are price takers and equilibrium occurs where price equals marginal cost. In the short run, firms will shut down if price falls below average variable cost.
3. In the long run, firms will enter or exit the market until price equals minimum average cost and normal profits are achieved. Perfect competition leads to allocative and productive efficiency.
The document discusses market structures, specifically perfect competition. It defines key characteristics of perfect competition including a large number of small firms, homogeneous products, free entry and exit, and firms being price takers. Under perfect competition, each firm's demand curve is perfectly elastic and marginal revenue equals price. Firms produce where price equals marginal cost to maximize profits. In the long run, normal profits are achieved as entry and exit cause supply to equal demand. Perfect competition leads to allocative and productive efficiency.
- A market is defined as the interaction between buyers and sellers of a product where the price tends to be uniform. Market structure depends on the number of firms, nature of products, barriers to entry, and degree of price control.
- Under perfect competition there are many small firms, homogeneous products, free entry and exit, and no single firm can influence price. Equilibrium occurs where marginal cost equals price.
- Monopoly is characterized by a single firm, no close substitutes, and high barriers to entry. The monopolist's equilibrium occurs where marginal revenue equals marginal cost and price is above marginal cost.
The document defines and explains the characteristics of perfect competition. It states that a perfectly competitive market has many small firms, identical products, free entry and exit, and perfect information. Firms are price takers and the industry supply and demand curve determines price. The individual firm's demand curve is perfectly elastic and it will produce where price equals marginal cost. In the short run, firms can experience super-normal profits, normal profits, losses or exit the market if average costs exceed average revenue. In long run equilibrium, firms earn only normal profits.
The document discusses key concepts relating to perfect competition, including:
- Firms are price-takers and face perfectly elastic demand in competitive markets
- Profit maximization occurs where marginal revenue equals marginal cost
- In the short-run, a firm may earn profits, losses, or just cover costs
- In the long-run, if profits exist, entry by new firms will increase supply and drive prices down until profits are eliminated
There are 4 main types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. In both the short run and long run, firms will produce where marginal cost equals marginal revenue to maximize profits. The perfectly competitive market leads to productive and allocative efficiency.
This document provides an overview of different market structures, with a focus on perfect competition. It defines key concepts related to revenue, costs, and profit maximization for firms in competitive markets. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. Equilibrium occurs where marginal cost equals marginal revenue. The document also discusses long-run equilibrium and how perfect competition leads to allocative efficiency.
1. The document discusses the characteristics and pricing behavior of perfectly competitive markets. It defines perfect competition and describes its key features.
2. Under perfect competition, firms are price takers and equilibrium occurs where price equals marginal cost. In the short run, firms will shut down if price falls below average variable cost.
3. In the long run, firms will enter or exit the market until price equals minimum average cost and normal profits are achieved. Perfect competition leads to allocative and productive efficiency.
The document discusses market structures, specifically perfect competition. It defines key characteristics of perfect competition including a large number of small firms, homogeneous products, free entry and exit, and firms being price takers. Under perfect competition, each firm's demand curve is perfectly elastic and marginal revenue equals price. Firms produce where price equals marginal cost to maximize profits. In the long run, normal profits are achieved as entry and exit cause supply to equal demand. Perfect competition leads to allocative and productive efficiency.
- A market is defined as the interaction between buyers and sellers of a product where the price tends to be uniform. Market structure depends on the number of firms, nature of products, barriers to entry, and degree of price control.
- Under perfect competition there are many small firms, homogeneous products, free entry and exit, and no single firm can influence price. Equilibrium occurs where marginal cost equals price.
- Monopoly is characterized by a single firm, no close substitutes, and high barriers to entry. The monopolist's equilibrium occurs where marginal revenue equals marginal cost and price is above marginal cost.
The document defines and explains the characteristics of perfect competition. It states that a perfectly competitive market has many small firms, identical products, free entry and exit, and perfect information. Firms are price takers and the industry supply and demand curve determines price. The individual firm's demand curve is perfectly elastic and it will produce where price equals marginal cost. In the short run, firms can experience super-normal profits, normal profits, losses or exit the market if average costs exceed average revenue. In long run equilibrium, firms earn only normal profits.
This chapter discusses perfect competition and profit maximization in competitive markets. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where marginal revenue equals marginal cost.
2. In the short run, firms will shut down if price falls below average variable cost or operate at a loss if price is between average variable and average total cost. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium price and quantity in both the
This chapter discusses perfect competition and profit maximization in perfect competition. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where MR=MC.
2. In the short run, firms will shut down if P<AVC or operate to minimize losses if ATC>P>AVC. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium prices and quantities in the short and long run through adjustments to
Chapter 2 detailed on market structures.pptnatan82253
This document discusses market structures and pricing under perfect competition and monopoly. It begins by defining key economic concepts like price, market structures, and competitiveness. It then examines the characteristics and profit maximization process of perfectly competitive firms in both the short-run and long-run. Key points are that competitive firms are price-takers and produce where price equals marginal cost. The document also analyzes monopoly market structure, noting that monopolists face downward sloping demand and are price-setters that produce where marginal revenue equals marginal cost to maximize profits. Barriers to entry allow monopolies to earn economic profits in the long-run.
Chapter (14) Firms in Competitive Markets In this ch.docxtidwellveronique
Chapter (14)
Firms in Competitive Markets
In this chapter, we will discuss the general characteristics of a perfectly competitive
market, and the operations of a perfectly competitive firm.
In any economy, there exists a number of market structures, these are:
1. Perfectly competitive market.
2. Monopoly
3. Oligopoly
4. Monopolistic competitive market.
In the chapter, we will discuss the perfectly competitive market, whereas the following 3
chapters will introduce to us the other market structures.
One major difference between perfectly competitive market and all other markets is that
all these markets (other than the perfectly competitive market) are considered imperfectly
competitive markets.
What do perfectly and imperfectly competitive markets mean?
We will start first by listing the major characteristics of a perfectly competitive market.
Characteristics of a perfectly competitive market:
1. Many small sellers that no producer can affect the market price of the product.
2. Many small consumers that no consumer can affect the market price of the product.
3. Homogeneous or standard product supplied by all producers.
4. Any firm operating in this market is a price taker, where firms in this market produce
and sell at the given market price.
5. Barriers to entry to this market are very low and even nonexistent. Hence firms can
enter and leave the industry freely.
From the above characteristics, we can conclude the following definition of a perfectly
competitive market:
A perfectly competitive market is a market where any firm has no control on
determining the price of its product. In other words, it is the market forces (that is
forces of DD and SS) that determines the price of perfectly competitive firms’ products,
and the firms operating in this market accept these market ‘prices; hence we call perfectly
competitive firms as price-takers that is taking the price of their products from the market
and having no control on setting or determining the price of their products.
When a firm has no control on setting the price of its product, its DD curve is a
completely horizontal curve.
On the other side, imperfectly competitive market is a market where the operating firms
have some degree of control on setting the price of their products. The degree of control
determines the degree of imperfection existing in this market. Sine an imperfectly
competitive firm controls the price of its product, then its DD curve is a downward-
sloping curve.
In economics, we identify 3 major imperfectly competitive markets:
1. Monopoly
2. Oligopoly
3. Monopolistic Competitive Market
Objectives, Important Decisions: and Operations of a Perfectly Competitive Firm
To understand the operations of a perfectly competitive firm, we need to recall some
algebraic theorems to understand the below analysis.
1. When we have a horizontal function, its first derivative should be ...
Firms in competitive markets are price takers and maximize profits by producing where marginal revenue equals marginal cost. In the short run, a competitive firm's supply curve is its marginal cost curve. In the long run, firms will enter or exit the market to earn normal profits when price equals average total cost. If demand increases in the short run, price and quantity rise as firms earn profits. In the long run, entry of new firms causes supply to increase, price and profits to fall back to normal.
The document discusses the concept of perfect competition in economics. It provides the key characteristics that define a perfectly competitive market including that there are many small firms, no barriers to entry or exit, identical products, and complete information. Firms are price takers and seek to maximize profits by producing where marginal cost equals marginal revenue. In the long run, perfect competition leads to zero economic profits as new firms enter if profits are positive and firms exit if losses occur.
Session 10 firms in competitive markets May Primadani
A perfectly competitive market has many small firms, identical products, and free entry and exit. Each firm is a price taker and maximizes profits by producing where marginal revenue equals marginal cost. In the short run, firms will shut down if price is below average variable cost, while in the long run firms will exit if price is below average total cost. Market supply results from the aggregation of individual firm supplies. In the long run, entry and exit of firms drives the market to equilibrium with zero profits.
MBA 681 Economics for Strategic DecisionsPrepared by Yun Wan.docxalfredacavx97
MBA 681 Economics for Strategic Decisions
Prepared by Yun Wang
1. How does firm maximize profit.
2. Poduction decision in the perfect competitive market.
3. Production decision in monopolistic competitive market.
4. Production decision in oligopoly.
5. Production decision in monoply.
6. Two special models in oligopoly market.
1. How a Firm Maximizes Profit:
All firms try to maximize profits based on the following equation:
Profit = Total Revenue − Total Cost
The rules we have just developed for profit maximization are:
1. The profit-maximizing level of output is where the difference between total revenue and total
cost is greatest, and
2. The profit-maximizing level of output is also where MR = MC.
Notice: All of these rules do not require the assumption of market type; they are true for all
firms with different market structures (perfect competition, monopolistic competition,
oligopoly, monopoly)!
The Four Market Structures:Structures
Market Structure
Characteristic Perfect Competition
Monopolistic
Competition Oligopoly Monopoly
Type of product Identical Differentiated Identical or differentiated Unique
Ease of entry High High Low Entry blocked
Examples of
industries
Growing wheat
Poultry farming
Clothing stores
Restaurants
Manufacturing computers
Manufacturing automobiles
First-class mail delivery
Providing tap water
2. Profit Determination in Perfect Competitive Market:
A firm maximizes profit at
the level of output at which
marginal revenue equals
marginal cost.
The difference between
price and average total cost
equals profit per unit of
output.
Total profit equals profit per
unit of output, times the
amount of output: the area
of the green rectangle on the
graph.
In the graph on the left, price
never exceeds average cost,
so the firm could not possibly
make a profit.
The best this firm can do is to
break even, obtaining no
profit but incurring no loss.
The MC = MR rule leads us to
this optimal level of
production.
The situation is even worse
for this firm; not only can it
not make a profit, price is
always lower than average
total cost, so it must make
a loss.
It makes the smallest loss
possible by again following
the MC = MR rule.
No other level of output
allows the firm’s loss to be
so small.
Identifying Whether a Firm Can Make a Profit
Once we have determined the quantity where MC = MR, we can immediately know
whether the firm is making a profit, breaking even, or making a loss. At that quantity,
• If P > ATC, the firm is making a profit
• If P = ATC, the firm is breaking even
• If P < ATC, the firm is making a loss
Even better: these statements hold true at every level of output.
However, if the price is too low, i.e. below the minimum point of
AVC, the firm will produce nothing at all.
The quantity supplied is zero below this point.
3. Profit Determination in Monopolistic Competitive Market:
(1 of 3)
In the short run, a monopol.
1) The document discusses the concept of perfect competition and firm equilibrium under conditions of perfect competition.
2) A key aspect of perfect competition is that there are many small producers and consumers in the market buying and selling homogeneous products, and all participants have perfect information. The market price is determined by supply and demand forces outside the control of individual firms.
3) For a firm to be in equilibrium under perfect competition, its marginal cost must equal its marginal revenue (which is equal to the market price). At this equilibrium point, the firm maximizes its profits.
4) The document contrasts the short run and long run equilibriums for firms under perfect competition and how super normal profits, normal profits
This document discusses market structures, specifically perfect competition. It defines key features of perfect competition including a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and maximize profits by producing where marginal revenue equals marginal cost. In the long run, no firms earn supernormal profits and all firms earn only normal profits as entry and exit leads to equilibrium.
11 perfect competition class economics slides for kugannibhai
This document provides an overview of the key concepts of perfect competition, including:
(1) Perfect competition is defined by many small firms, homogeneous products, perfect information and free entry/exit.
(2) In perfect competition, each firm is a price taker and faces a horizontal demand curve equal to the market price.
(3) A perfectly competitive firm will produce where price equals marginal cost to maximize profits in both the short and long run.
(4) Long run competitive equilibrium exists when there are no incentives for firms to enter/exit the industry or change output levels.
This document discusses the characteristics of pure competition in markets. It defines pure competition as having many small firms, standardized products, free entry and exit into the market, and firms that are price takers. The document outlines the objectives of analyzing pure competition as examining demand from the seller's perspective, how firms respond to price in the short-run, long-run industry adjustments, and efficiency. It also provides examples of profit maximization and loss minimization for competitive firms.
The document discusses the characteristics and behavior of firms in a perfectly competitive market. It explains that in the short run, a competitive firm will shut down if price is below average variable cost, while in the long run it will exit the market if price is below average total cost. The firm's marginal cost curve represents its supply curve. The market supply curve is determined by the summation of individual firms' supply. In the long run, free entry and exit will drive profits to zero.
This document discusses the concept of perfect competition. It defines perfect competition as a market with many small buyers and sellers, homogeneous products, perfect information, and free entry and exit. Under perfect competition, each firm is a price taker and faces a horizontal demand curve. In the short run, a perfectly competitive firm will produce where price equals marginal cost to maximize profits or minimize losses. In the long run, the market reaches equilibrium when no firms want to enter or exit and each firm produces at the lowest point on its long-run average total cost curve.
Equilibrium of Firm Under Perfect CompetitionPiyush Kumar
The ppt incorporates lots of animations for clear explanation on graphs and curves, it's better to download it first and then surely you will be cherished with it
1. The document discusses the production process of firms, including the concepts of production, costs, profits, and the production decision process.
2. It explains the differences between accounting costs, economic costs, explicit costs, and implicit costs. Accounting profits consider explicit costs only, while economic profits consider both explicit and implicit costs.
3. The production process involves using inputs like labor, capital, and raw materials through a production function to transform these inputs into outputs according to the technology used. The levels of inputs can be varied in the long run but not the short run.
1. The document discusses the production process of firms, including the concepts of production, costs, and profit maximization.
2. It explains that production involves transforming inputs into outputs using factors of production, with the goal of firms being to maximize profits.
3. The production process involves decisions about how much output to supply, which production technology to use, and how much of each input to demand.
Under perfect competition, a firm is in equilibrium when:
1) Its marginal cost is equal to its marginal revenue, meaning it is producing at the lowest possible average cost.
2) It is earning only normal profits in both the short run and long run. Any super-normal or losses will cause entry or exit of firms until price returns to the normal profit level.
3) There is no incentive for the firm to change its output level, as this equilibrium point maximizes profits given market conditions outside of the firm's control.
The document describes the parts and functions of a lathe machine. It discusses the bed, headstock, tailstock, carriage, feed mechanism, and other major components. The headstock holds and rotates the workpiece while the carriage supports the cutting tool and allows it to move longitudinally. Common lathe operations like turning, facing, tapering and chamfering are also summarized. Safety practices and proper use of lathes, tool holders and accessories are emphasized.
The excess free cash flow model, excess operating cash flow model, and excess earnings model are all valuation methods that are equivalent to discounted cash flow (DCF) valuation under consistent implementation. They discount excess accounting earnings or residual income instead of excess free cash flows. The key difference between the models is how changes in working capital, accruals, and capital expenditures are treated. Specifically, the excess earnings model can be restated as the DCF model plus components related to changes in investments and accruals.
This chapter discusses perfect competition and profit maximization in competitive markets. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where marginal revenue equals marginal cost.
2. In the short run, firms will shut down if price falls below average variable cost or operate at a loss if price is between average variable and average total cost. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium price and quantity in both the
This chapter discusses perfect competition and profit maximization in perfect competition. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where MR=MC.
2. In the short run, firms will shut down if P<AVC or operate to minimize losses if ATC>P>AVC. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium prices and quantities in the short and long run through adjustments to
Chapter 2 detailed on market structures.pptnatan82253
This document discusses market structures and pricing under perfect competition and monopoly. It begins by defining key economic concepts like price, market structures, and competitiveness. It then examines the characteristics and profit maximization process of perfectly competitive firms in both the short-run and long-run. Key points are that competitive firms are price-takers and produce where price equals marginal cost. The document also analyzes monopoly market structure, noting that monopolists face downward sloping demand and are price-setters that produce where marginal revenue equals marginal cost to maximize profits. Barriers to entry allow monopolies to earn economic profits in the long-run.
Chapter (14) Firms in Competitive Markets In this ch.docxtidwellveronique
Chapter (14)
Firms in Competitive Markets
In this chapter, we will discuss the general characteristics of a perfectly competitive
market, and the operations of a perfectly competitive firm.
In any economy, there exists a number of market structures, these are:
1. Perfectly competitive market.
2. Monopoly
3. Oligopoly
4. Monopolistic competitive market.
In the chapter, we will discuss the perfectly competitive market, whereas the following 3
chapters will introduce to us the other market structures.
One major difference between perfectly competitive market and all other markets is that
all these markets (other than the perfectly competitive market) are considered imperfectly
competitive markets.
What do perfectly and imperfectly competitive markets mean?
We will start first by listing the major characteristics of a perfectly competitive market.
Characteristics of a perfectly competitive market:
1. Many small sellers that no producer can affect the market price of the product.
2. Many small consumers that no consumer can affect the market price of the product.
3. Homogeneous or standard product supplied by all producers.
4. Any firm operating in this market is a price taker, where firms in this market produce
and sell at the given market price.
5. Barriers to entry to this market are very low and even nonexistent. Hence firms can
enter and leave the industry freely.
From the above characteristics, we can conclude the following definition of a perfectly
competitive market:
A perfectly competitive market is a market where any firm has no control on
determining the price of its product. In other words, it is the market forces (that is
forces of DD and SS) that determines the price of perfectly competitive firms’ products,
and the firms operating in this market accept these market ‘prices; hence we call perfectly
competitive firms as price-takers that is taking the price of their products from the market
and having no control on setting or determining the price of their products.
When a firm has no control on setting the price of its product, its DD curve is a
completely horizontal curve.
On the other side, imperfectly competitive market is a market where the operating firms
have some degree of control on setting the price of their products. The degree of control
determines the degree of imperfection existing in this market. Sine an imperfectly
competitive firm controls the price of its product, then its DD curve is a downward-
sloping curve.
In economics, we identify 3 major imperfectly competitive markets:
1. Monopoly
2. Oligopoly
3. Monopolistic Competitive Market
Objectives, Important Decisions: and Operations of a Perfectly Competitive Firm
To understand the operations of a perfectly competitive firm, we need to recall some
algebraic theorems to understand the below analysis.
1. When we have a horizontal function, its first derivative should be ...
Firms in competitive markets are price takers and maximize profits by producing where marginal revenue equals marginal cost. In the short run, a competitive firm's supply curve is its marginal cost curve. In the long run, firms will enter or exit the market to earn normal profits when price equals average total cost. If demand increases in the short run, price and quantity rise as firms earn profits. In the long run, entry of new firms causes supply to increase, price and profits to fall back to normal.
The document discusses the concept of perfect competition in economics. It provides the key characteristics that define a perfectly competitive market including that there are many small firms, no barriers to entry or exit, identical products, and complete information. Firms are price takers and seek to maximize profits by producing where marginal cost equals marginal revenue. In the long run, perfect competition leads to zero economic profits as new firms enter if profits are positive and firms exit if losses occur.
Session 10 firms in competitive markets May Primadani
A perfectly competitive market has many small firms, identical products, and free entry and exit. Each firm is a price taker and maximizes profits by producing where marginal revenue equals marginal cost. In the short run, firms will shut down if price is below average variable cost, while in the long run firms will exit if price is below average total cost. Market supply results from the aggregation of individual firm supplies. In the long run, entry and exit of firms drives the market to equilibrium with zero profits.
MBA 681 Economics for Strategic DecisionsPrepared by Yun Wan.docxalfredacavx97
MBA 681 Economics for Strategic Decisions
Prepared by Yun Wang
1. How does firm maximize profit.
2. Poduction decision in the perfect competitive market.
3. Production decision in monopolistic competitive market.
4. Production decision in oligopoly.
5. Production decision in monoply.
6. Two special models in oligopoly market.
1. How a Firm Maximizes Profit:
All firms try to maximize profits based on the following equation:
Profit = Total Revenue − Total Cost
The rules we have just developed for profit maximization are:
1. The profit-maximizing level of output is where the difference between total revenue and total
cost is greatest, and
2. The profit-maximizing level of output is also where MR = MC.
Notice: All of these rules do not require the assumption of market type; they are true for all
firms with different market structures (perfect competition, monopolistic competition,
oligopoly, monopoly)!
The Four Market Structures:Structures
Market Structure
Characteristic Perfect Competition
Monopolistic
Competition Oligopoly Monopoly
Type of product Identical Differentiated Identical or differentiated Unique
Ease of entry High High Low Entry blocked
Examples of
industries
Growing wheat
Poultry farming
Clothing stores
Restaurants
Manufacturing computers
Manufacturing automobiles
First-class mail delivery
Providing tap water
2. Profit Determination in Perfect Competitive Market:
A firm maximizes profit at
the level of output at which
marginal revenue equals
marginal cost.
The difference between
price and average total cost
equals profit per unit of
output.
Total profit equals profit per
unit of output, times the
amount of output: the area
of the green rectangle on the
graph.
In the graph on the left, price
never exceeds average cost,
so the firm could not possibly
make a profit.
The best this firm can do is to
break even, obtaining no
profit but incurring no loss.
The MC = MR rule leads us to
this optimal level of
production.
The situation is even worse
for this firm; not only can it
not make a profit, price is
always lower than average
total cost, so it must make
a loss.
It makes the smallest loss
possible by again following
the MC = MR rule.
No other level of output
allows the firm’s loss to be
so small.
Identifying Whether a Firm Can Make a Profit
Once we have determined the quantity where MC = MR, we can immediately know
whether the firm is making a profit, breaking even, or making a loss. At that quantity,
• If P > ATC, the firm is making a profit
• If P = ATC, the firm is breaking even
• If P < ATC, the firm is making a loss
Even better: these statements hold true at every level of output.
However, if the price is too low, i.e. below the minimum point of
AVC, the firm will produce nothing at all.
The quantity supplied is zero below this point.
3. Profit Determination in Monopolistic Competitive Market:
(1 of 3)
In the short run, a monopol.
1) The document discusses the concept of perfect competition and firm equilibrium under conditions of perfect competition.
2) A key aspect of perfect competition is that there are many small producers and consumers in the market buying and selling homogeneous products, and all participants have perfect information. The market price is determined by supply and demand forces outside the control of individual firms.
3) For a firm to be in equilibrium under perfect competition, its marginal cost must equal its marginal revenue (which is equal to the market price). At this equilibrium point, the firm maximizes its profits.
4) The document contrasts the short run and long run equilibriums for firms under perfect competition and how super normal profits, normal profits
This document discusses market structures, specifically perfect competition. It defines key features of perfect competition including a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and maximize profits by producing where marginal revenue equals marginal cost. In the long run, no firms earn supernormal profits and all firms earn only normal profits as entry and exit leads to equilibrium.
11 perfect competition class economics slides for kugannibhai
This document provides an overview of the key concepts of perfect competition, including:
(1) Perfect competition is defined by many small firms, homogeneous products, perfect information and free entry/exit.
(2) In perfect competition, each firm is a price taker and faces a horizontal demand curve equal to the market price.
(3) A perfectly competitive firm will produce where price equals marginal cost to maximize profits in both the short and long run.
(4) Long run competitive equilibrium exists when there are no incentives for firms to enter/exit the industry or change output levels.
This document discusses the characteristics of pure competition in markets. It defines pure competition as having many small firms, standardized products, free entry and exit into the market, and firms that are price takers. The document outlines the objectives of analyzing pure competition as examining demand from the seller's perspective, how firms respond to price in the short-run, long-run industry adjustments, and efficiency. It also provides examples of profit maximization and loss minimization for competitive firms.
The document discusses the characteristics and behavior of firms in a perfectly competitive market. It explains that in the short run, a competitive firm will shut down if price is below average variable cost, while in the long run it will exit the market if price is below average total cost. The firm's marginal cost curve represents its supply curve. The market supply curve is determined by the summation of individual firms' supply. In the long run, free entry and exit will drive profits to zero.
This document discusses the concept of perfect competition. It defines perfect competition as a market with many small buyers and sellers, homogeneous products, perfect information, and free entry and exit. Under perfect competition, each firm is a price taker and faces a horizontal demand curve. In the short run, a perfectly competitive firm will produce where price equals marginal cost to maximize profits or minimize losses. In the long run, the market reaches equilibrium when no firms want to enter or exit and each firm produces at the lowest point on its long-run average total cost curve.
Equilibrium of Firm Under Perfect CompetitionPiyush Kumar
The ppt incorporates lots of animations for clear explanation on graphs and curves, it's better to download it first and then surely you will be cherished with it
1. The document discusses the production process of firms, including the concepts of production, costs, profits, and the production decision process.
2. It explains the differences between accounting costs, economic costs, explicit costs, and implicit costs. Accounting profits consider explicit costs only, while economic profits consider both explicit and implicit costs.
3. The production process involves using inputs like labor, capital, and raw materials through a production function to transform these inputs into outputs according to the technology used. The levels of inputs can be varied in the long run but not the short run.
1. The document discusses the production process of firms, including the concepts of production, costs, and profit maximization.
2. It explains that production involves transforming inputs into outputs using factors of production, with the goal of firms being to maximize profits.
3. The production process involves decisions about how much output to supply, which production technology to use, and how much of each input to demand.
Under perfect competition, a firm is in equilibrium when:
1) Its marginal cost is equal to its marginal revenue, meaning it is producing at the lowest possible average cost.
2) It is earning only normal profits in both the short run and long run. Any super-normal or losses will cause entry or exit of firms until price returns to the normal profit level.
3) There is no incentive for the firm to change its output level, as this equilibrium point maximizes profits given market conditions outside of the firm's control.
The document describes the parts and functions of a lathe machine. It discusses the bed, headstock, tailstock, carriage, feed mechanism, and other major components. The headstock holds and rotates the workpiece while the carriage supports the cutting tool and allows it to move longitudinally. Common lathe operations like turning, facing, tapering and chamfering are also summarized. Safety practices and proper use of lathes, tool holders and accessories are emphasized.
The excess free cash flow model, excess operating cash flow model, and excess earnings model are all valuation methods that are equivalent to discounted cash flow (DCF) valuation under consistent implementation. They discount excess accounting earnings or residual income instead of excess free cash flows. The key difference between the models is how changes in working capital, accruals, and capital expenditures are treated. Specifically, the excess earnings model can be restated as the DCF model plus components related to changes in investments and accruals.
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El documento presenta la capacitación de febrero 2016 para el personal de Innova Schools en Lima y provincias. Se capacitará a los profesores en grupos según su especialidad y nivel de experiencia, utilizando la modalidad grupo. Algunos profesores de provincia vendrán a Lima mientras que otros se capacitarán en su sede. Se detallan las fechas, lugares y procedimientos para la capacitación.
O documento descreve as principais fontes escritas do judaísmo rabínico, incluindo a Tanakh, os Targumim, os Midrashim e a Mishná. A tradição oral é central para o judaísmo rabínico e a Mishná foi compilada pelo Rabi Judá HaNassi para codificar a lei oral. O documento também lista importantes comentaristas como Rashi e Maimônides.
This document discusses cybercrime, including definitions, instruments, objectives, and legislation. It defines cybercrime as the use of computers or technology to commit illegal acts. Cybercrime can target computers themselves through malware or use computers as an intermediary to commit property, economic, personal, or political crimes. The document outlines international cooperation efforts and legal instruments addressing cybercrime, such as the Council of Europe's Convention on Cybercrime. The International Telecommunication Union works to develop model cybercrime laws and facilitate capacity building and international cooperation around combating cybercrime. Creating universally applicable international cybercrime legislation faces challenges due to the nature of cybercrime and political tensions between countries.
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Blitz was a Portuguese music magazine established in 1984 that aligned itself with emerging underground music scenes in opposition to the dominant record industry. The magazine's journalists saw themselves as "militant" in their promotion of new artists and tastes over mainstream commercial music. Through its writing, Blitz advocated an "ideology of difference" that valued creativity, innovation, and authenticity over imitation, conservatism, and music made only for mass popularity. This ideological stance positioned the magazine and its journalism against the mainstream Portuguese music industry and in support of independent labels, radio shows, retailers, and other media that shared its focus on new and different artists.
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Worksheet for a Merchandising Business.pptJiaJunWang17
The document provides information about Beach Day Coolers, including its trial balance, adjusting entries, income statement, statement of owner's equity, and balance sheet for the year ended December 31, 2012. Key points covered include adjusting the inventory account based on a physical count, and preparing the multiple financial statements and closing entries.
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This PowerPoint compilation offers a comprehensive overview of 20 leading innovation management frameworks and methodologies, selected for their broad applicability across various industries and organizational contexts. These frameworks are valuable resources for a wide range of users, including business professionals, educators, and consultants.
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INCLUDED FRAMEWORKS/MODELS:
1. Stanford’s Design Thinking
2. IDEO’s Human-Centered Design
3. Strategyzer’s Business Model Innovation
4. Lean Startup Methodology
5. Agile Innovation Framework
6. Doblin’s Ten Types of Innovation
7. McKinsey’s Three Horizons of Growth
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13. The Double Diamond
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15. TRIZ Problem-Solving Framework
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17. Stage-Gate Model
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Frameworks/Models included:
Microsoft’s Digital Transformation Framework
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Forrester’s Digital Transformation Framework
IDC’s Digital Transformation MaturityScape
MIT’s Digital Transformation Framework
Gartner’s Digital Transformation Framework
Accenture’s Digital Strategy & Enterprise Frameworks
Deloitte’s Digital Industrial Transformation Framework
Capgemini’s Digital Transformation Framework
PwC’s Digital Transformation Framework
Cisco’s Digital Transformation Framework
Cognizant’s Digital Transformation Framework
DXC Technology’s Digital Transformation Framework
The BCG Strategy Palette
McKinsey’s Digital Transformation Framework
Digital Transformation Compass
Four Levels of Digital Maturity
Design Thinking Framework
Business Model Canvas
Customer Journey Map
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Four Market Structures
1. Four Market Structures
The focus of this lecture is the four market structures. Students will learn the characteristics of pure
competition, pure monopoly, monopolistic competition, and oligopoly. Using the cost schedule from the
previous lecture, the idea of profit maximization is explored.
OBJECTIVES
1. Identify various market structures and their characteristics.
2. Be able to category firms into four market structures.
3. Describe the effects of imperfect competition upon the market and the firm.
4. Understand the pricing structure of the four structures.
TOPICS
Please read all the following topics.
PERFECT COMPETITION
PERFECT COMPETITION CONT.
PERFECT COMPETITION EXAMPLE
PURE MONOPOLY
MONOPOLY EXAMPLE
PRICE DISCRIMINATION
MONOPOLISTIC COMPETITION
OLIGOPOLY
TECHNOLOGICAL DEVELOPMENT
ECONOMIC EFFICIENCY
2. Perfect Competition
Pure or perfect competition is rare in the real world, but the model is important because it helps
analyze industries with characteristics similar to pure competition. This model provides a context in
which to apply revenue and cost concepts developed in the previous lecture. Examples of this model
are stock market and agricultural industries.
Characteristics
1. Many sellers: there are enough so that a single seller’s decision has no impact on market price.
2. Homogenous or standardized products: each seller’s product is identical to its competitors’.
3. Firms are price takers: individual firms must accept the market price and can exert no influence on
price.
4. Free entry and exit: no significant barriers prevent firms from entering or leaving the industry.
Demand
The individual firm will view its demand as perfectly elastic. A perfectly elastic demand curve is a
horizontal line at the price. The demand curve for the industry is not perfectly elastic, it only appears
that way to the individual firms, since they must take the market price no matter what quantity they
produce. Therefore, the firm’s demand curve is a horizontal line at the market price.
Marginal revenue (MR) is the increase in total revenue resulting from a one-unit increase in output.
Since the price is constant in the perfect competition. The increase in total revenue from producing 1
extra unit will equal to the price. Therefore, P= MR in perfect competition.
3. Profit-Maximizing Output
Short Run Analysis
In the short run, the firm has fixed resources and maximizes profit or minimizes loss by adjusting output. Firms should
produce if the difference between total revenue and total cost is profitable (EP >0), or if the loss is less than the fixed cost
(EP>- FC). The firm should not produce, but should shut down in the short run if its loss exceeds its fixed costs. By shutting
down, its loss will just equal those fixed costs. Fixed cost in real life would be rent of the office, business license fees,
equipment lease, etc. These cost would have to be paid with or without any output. Therefore, fixed cost would be the loss
of shut down at any time. If by producing one unit of output, this loss could be lowered, then this unit should be produced
to minimize the loss. However, if by producing one unit of output, this loss would be higher , then this unit should not be
produced. The firm should shut down, just pay for the fixed cost.
If EP< - FC firm should shut down. Then its lost will be the Fixed cost. EP = - FC. In order for EP < - FC, market price, P, must
be lower than the minimum AVC.
If EP> - FC, firm should produce. That is when market price is greater than minimum AVC.
Marginal revenue and marginal cost (MC) are compared to decide the profit-maximizing output.
If MR > MC, then the firm should continue to produce.
If MR = MC, then the firm should stop producing the additional unit. As the additional unit’s MC would be higher according
to law of diminishing returns, MR would be less than MC; that is, the firm would loss profit by producing additional units.
Therefore, this is the profit maximizing output level.
If MR < MC, then the firm should lower its output.
In conclusion:
The shutdown point is the level of output and price at which the firm just covers its total variable cost. If the MR of the
product is less than the minimum average variable cost (min AVC), the firm will shut down because this action minimizes
the firm’s loss. In this case, the firm’s economic loss equals its total fixed costs. If MR < min AVC, then each additional unit
produced would increase the loss. For pure competition, MR is equal to price as the firm is facing a perfectly elastic
demand. Therefore, for short run, if Price < min AVC, then the firm should shut down. If Price > min AVC, then the firm
should produce. Price and MC are compared to find the profit maximizing or loss minimizing output level. The supply curve
of the pure competition firms would be the portion of the MC curve above the min AVC.
1. If EP < - FC or Market P < Min AVC, firm should shut down. Output = 0 , and EP = -FC
2. If EP > - FC or Market P > Min AVC, firm should produce. Firm's output level should be at where MR=MC or P=MC.
Use EP = TR - TC to get economic profit of the firm.
4. Perfect Competition Cont.
Following the rules discussed in the previous section. Here is an example.
Firms fixed cost is $100, its min AVC is $55.
If market price is 50 which is less than min AVC, the firm would loss $5 more by producing each unit. If the firm produces
one unit, its total loss would be $5 plus $100 fixed cost. If the firm decides to shut down, its loss would be only $100 as the
firm does not need to pay for the variable cost. Shut down would be the loss minimization strategy.
If the market price is 60, the firm would lose $5 less by producing each unit. If the firm produces one unit, its total cost
would be fixed cost less $5, which is $95. The firm is better off by producing, not shutting down. When the market price is
higher than the minimum AVC, MR and MC should be compared to find out the optimal level of output.
Long Run Analysis
Obviously, the firm cannot be in loss for long. Three assumptions are made for the long run analysis:
1. Entry and exit are the only long run adjustments.
2. Firms in the industry have identical cost curves.
3. The industry is in constant return to scale.
In long run, if economic profits are earned, firms enter the industry, which increases the market supply, causing the product
price to go down. Until zero economic profits are earned, then the supply will be steady. If losses are incurred in the short
run, firms will leave the industry which decreases the market supply, causing the product price to rise until losses disappear.
This model is one of zero economic profits in long run. The long run equilibrium is achieved, the product price will be exactly
equal to, and production will occur at, each firm’s point of minimum average total cost.
5. Efficiency Analysis
1. Productive efficiency: occurs where P= min ATC. Perfect competitive firms will
achieve productive efficiency as firms must use the least-cost technology or they
won't survive.
2. Allocative efficiency: occurs where P = MC. Price represent the benefit that society
gets from additional units of a product, MC represents the cost to society of other
goods given up to produce this product. Dynamic adjustments will occur in this
market structure when changes in demand, supply or technology occurs. Perfect
competitive firms will achieve this efficiency. Since no explicit orders are given to
the industry, "the Invisible Hand" works in this system.
Even though both efficiencies are achieved in this system, the consumers are facing
standard products, making shopping to be no fun at all. On the other hand, the
consumers will receive the highest consumer surplus in this structure as the long run
market price will be at the min ATC. Producers will receive the lowest producer surplus
as consumers can easily find substitutes.
6. An Example
The following data represents a cost function of a perfect
competitive firm:
TP or Q AFC AVC ATC MC
0
1 60 45 105 45
2 30 42.5 72.5 40
3 20 40 60 35
4 15 37.5 52.5 30
5 12 37 49 35
6 10 37.5 47.5 40
7 8.57 38.57 47.14 45
8 7.5 40.63 48.13 55
9 6.67 43.33 50 65
10 6 46.5 52.5 75
If the market price, P < 37; this firm's output Q = 0; firm's
economic profit, EP = -60
If the market price, P > 37, this firm's output Q > 0; firms'
economic profit , EP= TR - TC.
For example, when P = 65, Q = 9, EP = $65 x 9 - 50 X 9 = 135
7. An Example Cont.
By given the market demand at various price level, a market equilibrium price could be found.
PRICE Qs (1 firm's output) PROFIT Qs(1500 firms in the market) / market supply Qd / market demand
26 0 -60 0 17000
32 0 -60 0 15000
38 5 -55 7500 13500
41 6 -39 9000 12000
46 7 -8 10500 10500
56 8 63 12000 9500
66 9 144 13500 8000
(assuming identical cost function for all firms)
TP or Q AFC AVC ATC MC
0
1 60 45 105 45
2 30 42.5 72.5 40
3 20 40 60 35
4 15 37.5 52.5 30
5 12 37 49 35
6 10 37.5 47.5 40
7 8.57 38.57 47.14 45
8 7.5 40.63 48.13 55
9 6.67 43.33 50 65
10 6 46.5 52.5 75
One firm's output level (column 2 in the above table) is
obtained by comparing P and MC. Since all firms are having
the same cost function, the market output level is the sum of
individual firms' output (column 4 in the above table).
By comparing the market supply and market demand, we can
find the market equilibrium at:
P= 46 and Q = 10500
At this level, each firm is losing 8 dollars, indicating a
contraction in this industry. Some firms may leave in the long
run, causing the market supply to decrease and equilibrium
price will increase to the break-even level.
8. Pure Monopoly
Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. Examples
are public utilities and professional sports leagues.
Characteristics
1. A single seller: the firm and industry are synonymous.
2. Unique product: no close substitutes for the firm’s product.
3. The firm is the price maker: the firm has considerable control over the price because it can control the quantity supplied.
4. Entry or exit is blocked.
Barriers to Entry
Economies of scale is the major barrier. This occurs where the lowest unit cost and, therefore, low unit prices for consumers
depend on the existence of a small number of large firms, or in the case of monopoly, only one firm. Because a very large
firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale.
Public utilities are known as natural monopolies because they have economies of scale in the extreme case. More than one
firm would be inefficient because the maze of pipes or wires that would result if there were competition among water
companies or cable companies. Legal barriers also exist in the form of patents and licenses, such as radio and TV stations.
Ownership or control of essential resources is another barrier to entry, such as the professional sports leagues that control
player contracts and leases on major city stadiums. It has to be noted that barrier is rarely complete. Think about the
telephone companies a couple decades ago; there was no substitute for the telephone. Nowadays, cellular phones are very
popular. It creates a substitute for your house phone, causing the traditional telephone companies to lose their monopoly
position.
Demand Curve
Monopoly demand is the industry or market demand and is therefore downward sloping. Price will exceed marginal
revenue because the monopolist must lower price to boost sales and cannot price discriminate in most cases. The added
revenue will be the price of the last unit less the sum of the price cuts which must be taken on all prior units of output. The
marginal revenue curve is below the demand curve.
9. Profit –Maximizing Output & Efficiency
Profit –Maximizing Output:
The MR = MC rule will still tell the monopolist the profit – maximizing output. The monopolist cannot charge the highest
price possible, it will maximize profit where TR minus TC is the greatest. This depends on quantity sold as well as on price.
The monopolist can charge the price that consumers will pay for that output level. Therefore, the price is on the demand
curve. Losses can occur in monopoly, although the monopolist will not persistently operate at loss in the long run.
Monopolies will sell at a smaller output and charge a higher price than would pure competitive producers selling in the
same market.
Income distribution is more unequal than it would be under a more competitive situation, unless the government regulates
the monopoly and prevents monopoly profits. If a monopoly creates substantial economic inefficiency and appears to be
long-lasting, antitrust laws could be used to break up the monopoly.
Efficiency:
1. Productive efficiency: occurs where P= min ATC. Monopoly firms will not achieve productive efficiency as firms will
produce at an output which is less than the output of min ATC. X-inefficiency may occur since there is no competitive
pressure to produce at the minimum possible costs.
2. Allocative efficiency: occurs where P = MC. This efficiency is not achieved because price( what product is worth to
consumers) is above MC (opportunity cost of product).
It is possible that monopoly is more efficient than many small firms. Economies of scale (natural monopoly) may make
monopoly the most efficient market model in some industries. However, X-inefficiency and rent-seeking cost (lobbying, legal
fees, etc.) can entail substantial costs, causing inefficiency.
Producer surplus is significant due to lack of competition, consumer surplus may be minimized. This market structure will
not contribute to a fair income distribution of our society.
10. An Example
In this example, the cost function is the same as the one used in the
perfect competition example. You can see from the following analysis
that the output level and market price are different in monopoly .
The output level is lower than output of the perfect competitive
firm; and price is higher than the price of perfect competitive firm.
Pd Qd TR MR EP
115 0 0 0
100 1 100 100 -5
83 2 166 66 21
71 3 213 47 33
63 4 252 39 42
55 5 275 23 30
48 6 288 13 3
42 7 294 6 -35.98
37 8 296 2 -89.04
33 9 297 1 -153
29 10 290 -7 -235
TP or Q AFC AVC ATC MC
0
1 60 45 105 45
2 30 42.5 72.5 40
3 20 40 60 35
4 15 37.5 52.5 30
5 12 37 49 35
6 10 37.5 47.5 40
7 8.57 38.57 47.14 45
8 7.5 40.63 48.13 55
9 6.67 43.33 50 65
10 6 46.5 52.5 75
By comparing the MR and MC unit by unit, we can find this firm's
output at:
Q = 4, and P= 63. This is the profit maximization output level, with
EP = 42.
It is possible for this firm to continue earning this profit in the long
run as there are no competition in the market.
11. Price Discrimination
Price discrimination is selling a good or service at a number of different prices, and the
price differences is not justified by the cost differences. In order to price discriminate,
a monopoly must be able to
1. be able to segregate the market
2. make sure that buyers cannot resell the original product or services.
Perfect price discrimination is a price discrimination that extracts the entire consumer
surplus by charging the highest price that consumer are willing to pay for each unit.
As a result, the demand curve becomes the MR curve for a perfect price discriminator.
Firms capture the entire consumer surplus and maximize economic profit.
12. Monopolistic Competition
Monopolistic competition refers to a market situation with a relatively large number of
sellers offering similar but not identical products. Examples are fast food restaurants
and clothing stores.
Characteristics
1. A lot of firms: each has a small percentage of the total market.
2. Differentiated products: variety of the product makes this model different from
pure competition model. Product differentiated in style, brand name, location,
advertisement, packaging, pricing strategies, etc.
3. Easy entry or exit.
Demand Curve
The firm’s demand curve is highly elastic, but not perfectly elastic. It is more elastic
than the monopoly’s demand curve because the seller has many rivals producing close
substitutes; it is less elastic than pure competition, because the seller’s product is
differentiated from its rivals.
13. Profit - Maximizing Output
The MR = MC rule will give the firms the profit – maximizing output. The price they charge would be on
the demand curve.
In the long run, the situation will tend to be breaking even for firms. Firms can enter the industry easily
and will if the existing firms are making an economic profit. As firms enter the industry, the demand curve
facing by an individual firm shift down, as buyers shift some demand to new firms until the firm just
breaks even. If the demand shifts below the break-even point, some firms will leave the industry in the
long run.
Therefore, most monopolistic competitive firms should experience break-even in the long run
theoretically. In reality, some firms experience profit as they able to distinguish themselves from the
others and build a loyal customer base; such as some name brand apparel companies. Some firms
experience lost in long run but may continue the business as they are still earning normal profit. These
firm owners usually like the flexible life style and willing to earn a normal profit that is lower than their
opportunity cost.
Price exceeds marginal cost in the long run, suggesting that society values additional units which are not
being produced. Average costs may also be higher than under pure competition, due to advertising cost
involved to attract customers from competitors. The various types, styles, brands and quality of products
offers consumers choices. However, economic inefficiency is the result. The excess capacity (producing at
the quantity that a firm produces is less than the quantity at which ATC is a minimum) exists in this
industry.
14. Oligopoly
Oligopoly exits where few large firms producing a homogeneous or differentiated
product dominate a market. Examples are automobile and gasoline industries.
Characteristics
1. Few large firms: each must consider its rivals’ reactions in response to its decisions
about prices, output, and advertising.
2. Standardized or differentiated products.
3. Entry is hard: economies of scale, huge capital investment may be the barriers to
enter.
Demand Curve
Facing competition or in tacit collusion, oligopolies believe that rivals will match any
price cuts and not follow their price rise. Firms view their demands as inelastic for
price cuts, and elastic for price rise. Firms face kinked demand curves. This analysis
explains the fact that prices tend to be inflexible in some oligopolistic industries.
15. Efficiency & Advertisement
1. Productive efficiency: occurs where P= min ATC.
Monopolistic competitive firms will not achieve productive efficiency as firms will
produce at an output which is less than the output of min ATC. Product differentiation is
the major cause of excess capacity.
2. Allocative efficiency: occurs where P = MC.
This efficiency is not achieved because price( what product is worth to consumers) is
above MC (opportunity cost of product).
Advertisement is very crucial for each firm in this market structure as firms need
exposure to get consumer's attention. However, too much spending will result in higher
cost, and lower profit. Price, product attributes, and advertisement are three main
factors that producers have to consider. The perfect combination cannot be forecasted
easily.
16. Game Theory & Cartel
Game theory suggests that collusion is beneficial to the participating firms. Collusion reduces uncertainty, increases profits,
and may prohibit entry of new rivals.
Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly (GM and
Ford) based on either a high-price or a low-price strategy. This example illustrated that GM or Ford will earn the highest
individual profit when each adopts low price strategy while other firm continues with the higher price strategy (in B or C).
But firms will earn the highest total profit when both adopt the high price strategy (A). When firms form a cartel, they are
acting as one entity (A). They will perform as they are a large monopoly, earning the highest total profit possible. However,
members do have an incentive to cheat as individuals can increase their own profits by cheating in short run (B or C). When
other members are aware of the cheating, they may carry out the same practice, sometimes it may result in a price war and
all members loss (D). Duopoly GM
Ford
High-price Low-price
High-price A: GM=$50M Ford=$50M B: GM=$60M Ford=$20M
Low-price C: GM=$20M Ford=$60M D: GM=$30M Ford=$30M
Profit Analysis GM Profit Ford Profit Total profit in the industry
A: Both firms adopt high price strategy Earns $50M Earns $50M $50 + $50 =$100M
B: GM lowers price and Ford continues with
high price strategy
Increased to $60 M Dropped to $20M $60 + $20 =$80M
C: Ford lowers price and GM continues with
high price strategy
Dropped to $20 M Increased to $60M $20 + $60 =$80M
D: Both firms adopt low price strategy Earns $30M Earns $30M $30 + $30 =$60M
The Organization of Petroleum Exporting Countries (OPEC) is a cartel. The eleven countries agreed on the output amount
and working together to control the world’s crude oil supply. In US, anti-trust law has set up guidelines for corporations to
follow to avoid collusion of large firms in the same industry and protect consumer rights.
17. Technological Development
Technological advance is a three-step process that shifts the economy‘s production possibilities curve
outward enabling more production of goods and services.
1. Invention: is the discovery of a product or process and the proof that it will work.
2. Innovation: is the first successful commercial introduction of a new product, the first use of a new
method, or the creation of a new form of business enterprise.
3. Diffusion: is the spread of innovation through imitation or copying.
Expenditures on research and development (R&D) include direct efforts by business toward invention,
innovation, and diffusion. Government also engages in R&D, particularly for national defense. Finding
the optimal amount of R&D is an application of basic economics: marginal benefit and marginal cost
analysis. Optimal R&D expenditures occur when the interest rate cost of funds is equal to the expected
rate of return.
Many projects may be affordable but not worthwhile because the marginal benefit is less than marginal
cost. Often the R&D spending decision is complex because the estimation of future benefits is highly
uncertain while costs are immediate and more clear-cut.
18. The Role of Market Structure
1. Pure competition: the small size of competitive firms and the fact hat they earn zero
economic profit in the long run leads to serious questions as to whether such producers can
finance substantial R&D programs. The firms in this market structure would spend no
significant amount. However, firms of the same industry may gather their resources and
develop R&D programs.
2. Monopolistic competition: there is a strong profit incentive to engage in product
development in this market structure as the firms depend on product differentiation to stand
out from a large number of rivals. However, most firms remain small which limits their ability
to secure inexpensive financing for R&D and any economic profits are usually temporary.
Therefore, spending on R&D is limited in this market structure.
3. Oligopoly: many of the characteristics of oligopoly are conducive to technical advances
including: their large size, ongoing economic profits, the existence of barriers to entry and a
large volume of sales. Firms in oligopoly spent the highest amount on R&D among the four
different market structures.
4. Pure monopoly: monopoly has little incentive to engage in R&D as the profit is protected by
absolute barriers to entry, the only reason for R&D would be defensive – to reduce the risk of a
new product or process which would destroy the monopoly.
19. Economic Efficiency
Economics is a science of efficiency in the use of scarce resources. Efficiency requires full employment of available
resources and full production. Full employment means all available resources should be employed. Full production
means that employed resources are providing maximum satisfaction for our material wants. Full production implies two
kinds of efficiency:
1. Allocative efficiency means that resources are used for producing the combination of goods and services most wanted
by society. For example, producing computers with word processors rather than producing manual typewriters.
2. Productive efficiency means that least costly production techniques are used to produce wanted goods and services.
Full efficiency means producing the "right" (Allocative efficiency) amount in the "right "way (productive efficiency).
Pure competition:
Productive efficiency occurs where price is equal to minimum average total cost (min ATC); at this point firms must use
the lease-cost technology or they won’t survive.
Under pure competition, this outcome will be achieved, as the long run equilibrium price of pure competitive firms
would be at the min ATC.
Allocative efficiency occurs where price is equal to marginal cost ( P=MC), because price is society’s measure of relative
worth of a product at the margin or its marginal benefit. And the marginal cost of producing product X measures the
relative worth of the other goods that the resources used in producing an extra unit of X could otherwise have produced.
In short, price measures the benefit that society gets from additional units of good X, and the marginal cost of this unit
of X measures the sacrifice or cost to society of other goods given up to produce more of X.
Under pure competition, this outcome will be achieved. Dynamic adjustments will occur automatically in pure
competition when changes in demand or in resources supply, or in technology occur. Disequilibrium will cause expansion
or contraction of the industry until the new equilibrium at P=MC occurs.
20. Efficiency Cont.
Non-perfect competition:
Price of non-perfect competitive firms will exceed marginal cost, because price exceeds marginal revenue and the firms
produce where marginal revenue (MR) and marginal cost are equal. Then the firms can charge the price that consumers will
pay for that output level. Allocative efficiency is not achieved because price (what product is worth to consumers) is above
marginal cost (opportunity cost of product). Ideally, output should expand to a level where P=MC, but this will occur only
under pure competitive conditions where P = MR. Productive efficiency is not achieved because the firms’ output is less
than the output at which average total cost is minimum.
Economies of scale (natural monopoly) may make monopoly the most efficient market model in some industries. X-
inefficiency, the inefficiency that occurs in the absence of fear of entry and rivalry, may occur in monopoly since there is no
competitive pressure to produce at the minimum possible costs. Rent-seeking behavior often occurs as monopolies seek to
acquire or maintain government –granted monopoly privileges. Such rent-seeking may entail substantial cost (lobbying,
legal fees, public relations advertising etc.) which are inefficient.
There are several policy options available when monopoly creates substantial economic inefficiency:
1. Antitrust laws could be used to break up the monopoly if the monopoly’s inefficiency appears to be long-lasting.
2. Society may choose to regulate its prices and operations if it is a natural monopoly.
3. Society may simply ignore it if the monopoly appears to be short-lived because of changing conditions or technology.
Efficiency Vs technological advances:
Allocative efficiency is improved when technological advance involves a new product that increases the utility consumers
can obtain from their limited income. Process innovation can lower production cost and improve productive efficiency.
Innovation can create monopoly power through patents or the advantages of being first, reducing the benefit to society
from the innovation. Innovation can also reduce or even disintegrate existing monopoly power by providing competition
where there was none. In this case economic efficiency is enhanced because the competition drives prices down closer to
marginal cost and minimum average total cost.