-ECONOMICS-

Facoltà di Giurisprudenza

–Macerata-

Anno Accademico 2011/2012

Giulia LeonardiGiulia Leonardi

This report is about:

FIXED COSTS COMPETITIVE MARKET MARKET POWER

FIXED COSTS

Total firm’s costs can be divided into two types: FIXED COSTS (FC) and VARIABLE COSTS (VC).

Fixed costs: Costs that do not vary with the quantity of output produced. They are incurred even if the firm produces nothing at all.

A particular type of fixed cost is the average fixed cost (AFC), that is the fixed cost divided by the quantity of output (AFC= FC/Q).

In this table we can see that, in spite of the variation of the quantity of coffee produced in a coffee shop, fixed costs do not vary, whereas the average fixed cost decreases with the raise of the quantity of coffee produced.

Q= Quantity of coffee (cups per hour).FC= Fixed Costs.AFC= Average Fixed Costs.

Q FC AFC

0 $3.00  

1 $3.00 $3.00

2 $3.00 $1.50

3 $3.00 $1.00

4 $3.00 $0.75

5 $3.00 $0.60

6 $3.00 $0.50

7 $3.00 $0.43

COMPETITIVE MARKET A competitive market, sometimes called a

perfectly competitive market, has three characteristics:

1. There are many buyers and many sellers in the market.

2. The goods offered by the various sellers are largely the same.

3. Firms can freely enter or exit the market. As a result of these conditions, we can describe a

competitive market like a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker (they must accept the price).

Two considerations: It is just a theoretical model. It is necessary to distinguish between the

sector (or industry) and the single firm.

SECTOR FIRM

FOUR TYPES OF MARKET STRUCTURE

Economists who study industrial organisation divide markets into four types:

1. MONOPOLY2. OLIGOPOLY3. MONOPOLISTIC COMPETITION4. PERFECT COMPETITION With the exception of monopoly, the others three

types of markets are examples of competitive markets.

Number of firms Type of market Examples

One firm Monopoly Water or cable tv

Few firms OligopolyTennis balls or

cigarettes

Many firmsMonopolistic

Competition Novels or movies

 with differentiated

products  

  Perfect Competition Wheat or milk

  with identical products  

N.B.

Perfect competition is the contrary of monopoly.

In the monopolistic competition firms are price-makers, whereas in the perfect competition they are price-takers.

Perfect competition is not great for a firm because the price equals the marginal cost.

MARKET POWER

The market power is the ability of a single economic actor (or small group of actors) to have a substantial influence on market price.

We can distinguish: Price makersPrice makers Price takersPrice takers

Types of market Market power

MonopolyPrice makers (highest influence on

market price)

OligopolyPrice makers (high influence on market

price)

Monopolistic competition

Price makers (small influence on the market price)

Perfect competition Price takers (no influence)

This is the end of my report,thanks for your attention.