Upload
dynafrom
View
222
Download
0
Embed Size (px)
Citation preview
8/14/2019 Economics Unit 7 Notes
1/20
Competition
Perfect Competition
There are many sellers in this market-
Sellers have no control over price-
The sellers are all price takers-
Price is determined by interaction of demand and supply-
Goods that are sold similar in nature-
No restriction t enter this market-
Marginal revenue curve is flat-
Price = marginal revenue-
e.g. Farmers-
Monopolistic Competition
There are a lot of sellers in this market, not as many as perfect competition-
Sellers have a l ittle control over price-
Products are simi lar, but can be different in packaging and style-
There are few restrictions for entry-
Competition occurs through advertising-
Price > marginal revenue-
E.g. Restaurants, convenience stores-
Oligopoly Competition
There are a few sel lers in the market place, 3-10-
Have a fair amount of control over price- Products are different in model or style, example is cars-
There are many restrictions in this area by the government-
Competition occurs through advertising-
Demand curve is kinked-
E.g. Car manufacturing, telephone companies-
Monopoly
Only one seller in the market-
This seller has complete control over price-
The product that is sold is very unique-
Heavy government regulations and restriction of entry into this market- Marginal revenue is downward sloping-
Price is . Marginal revenue-
E.G. Ontario Hydro-
Cost Curves In Determining Output Level
Fixed cost - are usually a cost that don't change in the short run. Known as overhead. Costs that do not
change when total output produced changes.
I.e. RENT
Variable Cost - costs that can change in the short run. Known as direct costs. Costs that change directly
as output changes. If output increases goes up total variable costs will increase.
I.e. Cost of materials
CompetitionApril-24-09
8:18 AM
Unit 7 - Types of Competition Page 1
8/14/2019 Economics Unit 7 Notes
2/20
Total cost = variable cost + fixed costs
Average variable cost = variable costs / output
Average fixed cost = fixed cost / output
Average costs = total costs / output
Marginal costs = change in total costs / change in output
Total revenue = price * output
Marginal revenue = change in total revenue / change in output
Profit = total revenue - total costs
Fixed Costs : fixed cost does not change as quantity increases
Quantity
Fixed
Cost
Variable Costs : Increase as production increases. Wil l increase at an increasing rate. At first variable
cost will increase at a decreasing rate, however when companies reach diseconomies of scale, VC will
increase at a increasing rate.
Variable
Cost
Quantity
VC
FC
Total Cost : to draw total cost all we have to do is to add fixed cost curve to variable cost line. For this all
we do is translate to variable cost curve up to the fixed cost curve and run parallel to the variable cost
curve.
TC
Unit 7 - Types of Competition Page 2
8/14/2019 Economics Unit 7 Notes
3/20
Total Revenue : TR is just price * quantity sold. Therefore linear.
Total
Revenue
Quantity
Average Fixed Cost - fixed cost does not increase as quantity increase, average fixed cost to decrease as
quantity increases
Average
FixedCost
Quantity
Average Variable Costs - average variable cost will initially decrease until a minimum then increase.
Parabola.
Unit 7 - Types of Competition Page 3
8/14/2019 Economics Unit 7 Notes
4/20
Average
Variable
Cost
Quantity
Average
Variable Cost
Average Fixed Cost
Average Cost
Average Cost - add average fixed and variable cost. Average fixed cost is asymptote to the quantity Axis.
Marginal Cost - draw marginal cost calculate the change in TC and compare to change in quantity.
Decreases then increases it will intersect average variable cost and average cost at their minimum
points. This curve ends up being the supply curve.
Marginal
Cost
Quantity
Average
Variable Cost
Average Fixed Cost
Average Cost
Marginal Cost
Average Revenue - recall TR was a linear line with a positive slope this will cause the average revenue
line to be the direct inverse. It will look like demand curve.
Unit 7 - Types of Competition Page 4
8/14/2019 Economics Unit 7 Notes
5/20
Average
Revenue
Quantity
Marginal Revenue - difference between total revenue and divide it by the change in quantity. Steeper
slope then demand curve lying on the inside of the demand curve. However, for perfect competition it
will be flat.
Marginal
Revenue
Quantity
Average RevenueMarginalRevenue
Unit 7 - Types of Competition Page 5
8/14/2019 Economics Unit 7 Notes
6/20
Price Takers - a f irm in perfect competition that cannot influence the price of a good or service.
Firms in perfect competition called price takers. Faces perfectly elastic demand.
Economic Profit - total revenue - total cost. If costs are greater then revenue, then there is a economicloss, if they equal then it's break-even/normal profit, and if the revenue is greater then it is economic
profit.
Measured by the total vertical distance between TR and TC
Short run - timeframe which each firm has a given plant, and number of firms is fixed. Short run
fluctuations such as price. Decide:
Produce or shutdown1.
To produce, and what quantity2.
Long run - time frame, each firm change size of its plant and decide whether or not to leave the
industry. Other firms can decide to leave or enter. Long run: plant size, and number of fi rms change.Decide:
Whether to increase/decrease plant size1.
Whether to stay in industry or leave2.
Marginal analysis -compare MR with MC.
If MR > MC = Economic Profit - total output increases, economic profit increases
If MR < MC = Economic Loss - Profit decreases if output increases, and Economic profit increases if
output decreases
If MR = MC = Economic Profit is maximized.
Profit Maximizing Output
MR & MC
MC
MR
Profit Maximization
Point Economic Loss
Profit
Quantity
Three Possible Profit Outcomes in the Short Run
Normal Profit
Price
& Cost
ATCMC
ATC = Average Total Cost
Competition Cont.April-28-09
8:25 AM
Unit 7 - Types of Competition Page 6
8/14/2019 Economics Unit 7 Notes
7/20
Quantity
Price
& Cost
MR
ATCMC
Economic Profit
Quantity
Price
& Cost MR
ATCMC
Economic Loss
Quantity
Price
& Cost
MR
ATCMC
9
8
7
Loss
Profit
If price = minimum average total cost = break even. If Price > ATC then economic profit, if Price < ATC
then economic loss.
Shutdown Point - when the output and price at which the firm covers its total variable cost. AKA BREAK
EVEN
Unit 7 - Types of Competition Page 7
8/14/2019 Economics Unit 7 Notes
8/20
Quantity
Price
& Cost
MR0
ATCMC
Shutdown Point
MR1
MR2
Short run supply curve -
Quantity
Price
S
T
Made up by MC curve at all points above minimum average cost and the vertical axis at all prices below
minimum AVC.
Short run industry supply curve - shows the quantity supplied by the industry at each price when the
plant size and number of firms are constant. Quantity supplied is the sum of quantities supplied y all
firms in the industry at that price.
Industry Supply Curve
Price
Quantity
17
7
S1
7
17
7
17
Unit 7 - Types of Competition Page 8
8/14/2019 Economics Unit 7 Notes
9/20
If at shutdown, some firms will produce 7 per day, others 0.
Unit 7 - Types of Competition Page 9
8/14/2019 Economics Unit 7 Notes
10/20
Market Power - ability to influence the market, and in particular the market price, by influencing the
total quantity
Monopoly - industry that produces a good or service which no substitute, and one supplier protected bya barrier preventing entry.
2 distinct features
No close substitutes-
Legal or natural constraints that protect a firm from competitors
Barriers to entry-
Legal monopoly is a market in which competition and entry are restricted by the granting of a
public franchise, government licence, patent, or copyright
Public franchise is exclusive rights to supply good or service
Patents
Copyrights
Legal Barriers-
Natural monopoly
Industry which one firm can supply the entire market at a lower price than two or more firms can
NATURAL MONOPOLY
Natural Barriers-
Price
Quantity
ATC
D
Monopoly Price-Setting Strategies
Practise of selling different units of a good or service for different prices.
Different customers pay different prices
Limited to monopolies that sell services that cannot be resold
Price discrimination-
Firm that sell each unit of output at the same price to all customers
A Single Price Monopoly's Output and Price Decision
Single Price-
MonopolisticApril-30-09
8:48 AM
Unit 7 - Types of Competition Page 10
8/14/2019 Economics Unit 7 Notes
11/20
Price and marginal revenue-
Demand and Marginal Revenue
MR Demand
Marginal Revenue and Elasticity
Single price monopoly marginal revenue is related to the elasticity demand for its good-
In a monopoly, demand is always elastic.
Intercept of MR and MC = optimum output
Change in Demand
Increase in demand causes a rise in price and output and higher total profits for monopolist-
A change in demand will cause a change in price, output and profits-
Oligopoly
Rival firms follow price cut make demand inelastic, but firms are assumed not fol low a price increase
(making demand relatively elastic)
-
Unit 7 - Types of Competition Page 11
8/14/2019 Economics Unit 7 Notes
12/20
Oligopoly -market structure that small number of firms compete
Kinked Demand Curve Model
For oligopoly
If it raises its price, others will not follow1.
If it cuts its price, so wil l the other firms2.
MR
D
MC 0
MC 1
P
Q
Dominant Firm Oligopoly
OligopolyMay-04-09
8:30 AM
Unit 7 - Types of Competition Page 12
8/14/2019 Economics Unit 7 Notes
13/20
s 10
Quantity
Price
Unit 7 - Types of Competition Page 13
8/14/2019 Economics Unit 7 Notes
14/20
Extra NotesMay-05-09
7:53 PM
Unit 7 - Types of Competition Page 14
8/14/2019 Economics Unit 7 Notes
15/20
Unit 7 - Types of Competition Page 15
8/14/2019 Economics Unit 7 Notes
16/20
8/14/2019 Economics Unit 7 Notes
17/20
Unit 7 - Types of Competition Page 17
8/14/2019 Economics Unit 7 Notes
18/20
Unit 7 - Types of Competition Page 18
8/14/2019 Economics Unit 7 Notes
19/20
Unit 7 - Types of Competition Page 19
8/14/2019 Economics Unit 7 Notes
20/20