Upload
christina-palmer
View
238
Download
1
Tags:
Embed Size (px)
Citation preview
Market Structure
• Types of market structure:– Perfect Competition– Monopoly– Monopolistic Competition– Oligopoly
• Discussions:– Characteristics of each market– Demand curve (AR) and MR– Profits-maximization rule– Short run and long run output decision
Perfectly competitive marketCharacteristics:• Large number of buyers and sellers in the market. Firms are
price takers because the individual sales volume is relatively small compared to market volume.
• Each firm/ seller or each buyer acts independently, rather than coordinating decisions collectively
• Each firm produces a homogeneous (an identical) product: buyers cannot distinguish the product of one seller from that of another.
• Perfect information about prices– The prices of all sellers are known– A consumer will purchase at the lowest price available in the market– No sale can be made at any higher price.
• Free entry into and exit from market: Equal access to resources
• Absence of promotion strategy and transport cost.
Demand (AR) and MR curve
• Total revenue (TR) = P x Q• Average revenue (AR) = TR / Q = P• Marginal revenue (MR) = ΔTR / ΔQ
P Q TR=P x Q AR= TR/Q MR= ΔTR/ ΔQ
101010
123
102030
101010
101010
Kuantiti (Q)
P, AR, MR
P = AR = MR10
0 1 2 3
Demand at the market and firm level under perfect competition
Firm Market (industry)
RM10
Output
P
D
D S
S
RM10
2000 Output
P
P = AR = MRD
0 1 2
Equilibrium of a Firm
• A firm is in equilibrium when it earns maximum profit or when minimum losses occur.
• Equilibrium output = output level which gives the maximum profit to a firm.
Profit maximization• Total revenue and total cost approach
– Profit = TR – TC– Profit maximization: the highest vertical distance
between TR and TC.
• Marginal revenue and marginal cost approach– Profit maximization: MR = MC
Profit maximization under perfect competition
• Short-run output decision: MR = MC– P > AC firm earns economic profits/abnormal profit– P = AC zero economic profits/ normal profit– P < AC firm suffers economic losses– P < AC but P ≥ AVC loss by operating, but this loss
< FC– P < AVC shut down
• Long-run output decision
Short-run output decision
• P > AC • P = AC
MCAC
P1
P2
Q0Output (Q)
Price & costs
A
B
AR=MR=P=DD
TR = 0QAP1
TC = 0QBP2
Profit = TR – TC = P1ABP2
ACMC
AR=MR=P=DDAP
Q
Price & costs
Output (Q)0
TR = 0PAQ
TC = 0PAQ
Profit =TR –TC = 0
Firm incurs a loss
• P < AC but P > AVC
MCAC
AR=MR=P
Q0
P1
P2 A
B
TR = 0QBP1
TC = 0QAP2
TR < TC, firm incurs a loss = P1BAP2
This firm can reduce cost by using a better technology to obtain normal profit. AC shifts downwards.
MC AC
AVC
output
Harga & kos
output
Harga & kos
0
A
B
E
P
C1
C2
Q
TR = 0PBQ = 0C2EQ + C2EBP
TC = 0C1AQ = 0C2EQ + C2EAC1
The firm incurs a loss, but TR > VC or AR > AVC
P < AC – a loss
AR=MR=P
• MC and short-run supply curve for a competitive firm
AC
AVC
MC
Po
P1
P2
P3
Qo Q1 Q2 Q3
J
K
L
M
MC curve at points JKLM = a firm’s SS curve
Output
Price
Long-run competitive equilibrium• Free entry into and exit from market: if profits were
+ve, entry would occur and P would fall. If profits were –ve, exit would occur and P would rise. Ultimately P = AC, all firms in the market earn zero economic profits/ normal profit. P = MR= MC, P = minimum AC.
LACLMC
SACSMC
AR=MR=P
Q Output
P
0
Harga & kos
Calculation approach:
1. The cost function for a firm is given by
C = 5 + Q2
If the firm sells output in a perfectly competitive market and other firms in the industry sell output at a price of RM20, what price should the manager of this firm put on the product? What level of output should be produced to maximize profits? How much profits will be earned?
Answer:
- The manager should price the product at RM20
- Profit-maximizing output: MC = P.
MC = 2Q = 20, Q = 10
- Profits = TR – TC = PxQ – (5 + Q2)
= 10(20) – 5 – 100
= RM95
2. Suppose the cost function for a firm is given by C = 100 + Q2. If the firm sells output in a perfectly competitive market and other firms in the industry sell output at a price of RM10, what level of output should the firm produce to maximize profits or minimize losses? What will be the level of profits or losses if the firm makes the optimal decision?
Answer: P = RM10, MC = 2Q.Profit maximizing output: P = MC, 10 = 2Q,
Q = 5 units. Profit = TR – TC =10(5) – 100 – 52
= 50 – 100 – 25 = -RM75 The firm incurs a loss of RM75, which is
less than the loss of RM100 (fixed costs) that would result if the firm shut down its plant in the short run.
3. A vegetable seller faces a horizontal demand curve. Total variable costs are given by TVC=150Q – 20Q2 + Q3. At what price should the firm shut down?
Solution:Shut down point occurs when AVC is at the minimum point. It
also happens when P=MR=MC=AVC. Derive TVC to obtain MC. MC = dTVC/dQ = 150 – 40Q +3Q2
Divide TVC by Q to obtain AVC: AVC = TVC/Q = 150 – 20Q + Q2
To find shut down price, set MC = AVC: 150 – 40Q + 3Q2 = 150 – 20Q + Q2
2Q2 – 20Q = 0, 2Q(Q - 10) = 0 Q = 0 or Q = 10Substitute Q = 10 into the MC equation to obtain PP = MC = 150 – 40(10) + 3(10)2 = 50Shut down price is RM50.