Pure Competition Pure Monopoly Monopolistic Competition Oligopoly · 2016-11-27 · Pure Monopoly...

Pure Competition

Pure Monopoly

Monopolistic Competition

Oligopoly

Characteristics:

Rare in the real world

But…helps analyze industries which are similar to pure competition

Many sellers means that no one seller has an impact on price by its decisions alone

Products are standardized

Firms are “price-takers” – must accept the market price

Firms can freely enter and exit the market

Individual firm will view its demand as perfectly elastic

BUT…the demand curve is not perfectly elastic for the industry

WHY the difference??

Individual Firm’s Demand Curve

Industry’s Demand Curve

Industry’s Supply Curve

Firm is a “PRICE TAKER”

IMPORTANT:

When you graph this for a quiz/test, you want to put the industry first and then the firm!!!

Total Revenue (TR) = Price multiplied by quantity sold (TR = P x Q)

Average Revenue (AR)= price per unit for each firm in pure competition

Marginal Revenue (MR) = ∆ in TR for each additional quantity sold

AND will equal the unit price in conditions of pure competition

Assumptions of the Firm

Fixed plant

By adjusting output:

Will maximize profits OR

Will minimize losses

Profits = TR-TC

3 Questions each firm must answer:

1. Should the firm produce

2. If so, how much?

3. What will be the profit or loss?

Total Cost vs. Total Revenue

Firms should produce if the difference between TR and TC results in a profit (TR > TC)

Firms should produce that output which maximizes its profit or minimizes its loss

Profit (or loss) = TR – TC

So where do firms maximize profit?

Marginal Revenue vs. Marginal Cost

The firm will keep producing if MR > MC (the firm is still seeking profits)

The firm will stop producing at the point where MR < MC (i.e. the firm does not want to incur losses)

The Profit Maximization/Loss Minimization Rule =

In the short run, the firm may keep producing even if Total Cost is higher than Total Revenue

However, the firm may choose to “SHUT DOWN” if increases in Total Revenue does not cover Average Variable Costs at the production output

The “Shut Down” Rule:

For ALL Firms: If MR < AVC (average variable cost) at the

production output, the firm will “shut down”

In perfect competition – then P < AVC

Equilibrium price is where total QS = total QD

Sum of individual firms production = industry (or total) QS

Individual firms must take equilibrium price (“price takers”)

Supply plans of all competitive producers is a major determinant of product price

Assumptions:

1. Entry and exit of firms are the only long-run adjustments

2. Firms in the industry have identical cost curves

3. The industry is a constant-cost industry (i.e. entry and exit of firms doesn’t affect costs of the individual firms)

Product price = Each firm’s point of minimum long run average total cost (LRATC) – i.e. NORMAL PROFITS

In the Short Run though: If short term losses occur, firms leave the

industry Qs decreases, P increases, profits increase

If short term economic profits occur, firms will enter the industry Qs increases, P decreases, profits decrease or losses

occur/increase

Long run Supply:

Constant cost industry

Perfectly elastic supply curve (HORIZONTAL)

Level of output will not affect the price in the long run

Expansion or contraction does not affect resource prices or production costs

Entry/exit will affect quantity of output but price will always revert to equilibrium price

Long run Supply:

Increasing cost industry

Average cost curves shift upward as industry expands and downwards when it contracts

If D increases, ATC increase as firms enter the industry, and P increases to maintain normal profit

If D decreases, ATC decreases as firms exit the industry, P decreases, firms cannot attain above-normal profit

Long-run Supply

Decreasing cost industry

Supply will be downward sloping

ATC falls as the industry expands

Firms will enter until price is driven down to maintain normal profits

Regardless of cost model, long run equilibrium will have the same characteristics: The firm will make only NORMAL PROFITS

Productive efficiency occurs when P = minimum LRATC

Allocative efficiency occurs when P = MC If P > MC, then society values more units of good X and

resources are underallocated to the production of good X

If P < MC, then society values other goods more highly than good X and resources are overallocated to good X

Allocative efficiency implies maximum consumer and supplier surplus

Combined consumer and supplier surplus is maximized at the equilibrium price

On a piece of paper, draw the following graphs The perfectly competitive market

The perfectly competitive firm Show the relationship between the market price and the

firm’s price

Include on the firm’s graph the following: The Demand and Marginal Revenue Curve (D/MR)

The LONG RUN Avg Total Cost Curve (LRATC)

The LONG RUN Avg Varible Cost Curve (LRATC)

The LONG RUN Avg Fixed Cost Curve (LRAFC)

The Marginal Cost Curve (MC)



firm’s price


Show the firm making economic profits by drawing: The SHORT RUN Avg Total Cost Curve (SRATC)

The SHORT RUN Avg Varible Cost Curve (SRATC)

The SHORT RUN Avg Fixed Cost Curve (SRAFC)




firm’s price


Show the firm making economic losses by drawing: The SHORT RUN Avg Total Cost Curve (SRATC)






firm’s price

Include on the firm’s graph the following: The Demand and Marginal Revenue Curve

Show the firm making following the SHUT DOWN RULE by drawing: The SHORT RUN Avg Total Cost Curve (SRATC)




Pure Competition Pure Monopoly Monopolistic Competition Oligopoly · 2016-11-27 · Pure Monopoly...

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