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Perfect and Imperfect Competition (Imperfect Competition (Monopolistic…
Perfect and Imperfect Competition
Perfect (Pure) Competition
(Rare)
Characteristics
No price conrol
Price Takers
Do not have the ability to price
products on their own
Conditions of entry/exit are very easy
and without obstacles
Standardized products
A product for which all other
products in the market are identical
Perfect substitutes for each other
Non-price competition - None
Large number of firms
Sellers have a miniscule part of the market share
No control over firms demand and total product supply
Purely Competitive Demand
Perfectly elastic demand
Firm will produce as much or little as
they wish at the market price
Demand graphs as horizontal line
(at the price)
Imperfect Competition
Oligopoly
Characteristics
Control over price is limited by mutual interdependence,
considerable with collusion
Conditions to entry/exit are significant
Products are standardized or differentiated
Non-Price competition is typically a great deal
particularly with product differentiation
Few number of firms
Monopoly
Characteristics
Considerable price control
Conditions to entry/exit are blocked
Products are unique with no close substitute
Non-price competition: Mostly public relations
and advertising
One firm
Monopolistic competition
Characteristics
Differentiated products
No collusion
Firms have limited price control
Some control over price, but within narrow limits
Firms hold small market share
Conditions of entry/exit are relatively easy
Many firms
Non-price competition:
Considerable emphasis on advertising, brand names, trademarks
Demand Curve - Highly but not perfectly elastic
(Downward slope)
Long Run
Only a normal profit exists
Firms are still producing where
MR = MC
At this point firms
earn a normal profit
Long Run equilibrium is established
MR < MC
Produce less output to increase profit / decrease loss
Efficiency
Monopolistic competition is inefficient
P > min ATC is condition for productive inefficiency
P > MC is condition for allocative inefficiency
P = MC = Min ATC
Economic efficiency
Excess Capacity
Plant, resources and equipment are often underutilized because
firms are producing below the average total cost output levels
Firm Concentration
Four Firm Concentration ratio
Output of 4 largest firms /
Total output of industry
Limited - National in scope
Herfindahl Index
Sum of squared % market share
of all firms in the industry
Revenue Formulae
Total Revenue
TR = P X Q
Marginal Revenue
MR = Change in TR / Change in Quantity
Average Revenue
AR = TR / Q = P
Profit Maximisation
and
Loss Minimising
Total Revenue - Total Cost Approach
3 Questions
Has it been determined that the
firm should produce in the short run?
Is it necessary to calculate profit/loss
for the firm?
Should the firm produce at
all in the short run?
The competitive producer will wish
to produce at the output level where TR
exceeds TC by the greatest amount
Break even point
Output at which the firm makes a 0 profit
TR = TC
Calculations
TR = TC x Q
Prof/Loss = TR - TC
TC = TFC + TVC
Marginal Revenue - Marginal Cost Approach
Makes use of MR = MC rule
Price taker
P = MR = MC
3 Questions
What amount should be produced?
What economic prof/loss will be realised?
Should the firm produce?
Calculations
ATC = TC / Q
Prof/Loss = MR - ATC
MC = Change in TC / Change in Q
AVC = TVC / Q
AFC = TFC / Q
Loss minimising case
Firm should produce or shut down in short run
Losses at minimum where MR = MC
Producing adds more to revenue than to cost
Still produces because MR > Min AVC
Shutdown Case
Short run shutdown point
P < Min AVC
(Intersection of AVC and MC)
Short Run Supply
Shut Down
P is below AVC
Produce
P is = or above AVC
Break Even Point
MC intersects ATC