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Perfect And Imperfect Competitions (Economist group industries into four…
Perfect And Imperfect Competitions
Economist group industries into four sections which are called:
:eight_pointed_black_star: Pure competition
:eight_pointed_black_star: Pure monopoly
:eight_pointed_black_star: Monopolistic competition
:eight_pointed_black_star: Oligopoly
Pure Monopoly
: Involves only one firm which is the seller of goods or services which are unique so differentiation is not a problem. The entry of new firms are blocked so one firm constitute the whole industry. An example of a pure monopoly market is local utilities like electricity supply.
Monopolistic Competition
: Involves a relatively large number of firms producing and selling differentiated goods. There is non-price competition where employees can earn commission on their service performance. Entry and exit into the industry is relatively easy and an example of this market is retail trade.
Pure Competition
: Involves very large number of firms producing standardized products where new firms can enter or exit the industry easily. There are no control over price and there are none non-price competitions. Individual firms are seen as price-takers. An example of a pure competition market is Agriculture.
Oligopoly
: Involves only a few sellers and producers of standardized and differentiated products, which attributes to each others rivals and must take that into account when deciding on its own price and number of output. Examples of this market are steel work, auto repairs, farm implements etc.
Pure Competition
Demand for a purely competitive seller : :eight_pointed_black_star:Perfectly elastic Demand
Average Revenue
is revenue made per unit or average revenue received by seller.
Total Revenue
for each sales level is price multiplied by the corresponding quantity of the sales of the firm.
Marginal Revenue
is the change in
total revenue
or extra revenue that results from selling one more unit of output.
Profit-maximizing/ Loss-minimizing Case
In this case there is 3 questions asked :
:eight_pointed_black_star: Should we produce this product?
:eight_pointed_black_star: If so, in what amount?
:eight_pointed_black_star: What economic profit (or loss) will we realize?
Assuming that the firm wants to keep on producing instead of shutting down:
:star: Produce any unit of output whose marginal revenue (MR) exceeds it marginal cost (MC) :arrow_right: Selling the product adds to revenue more than adding to costs to produce.
In the short run maximizing profit (or minimizing loss) the rule MR = MC helps with the amount of output produced.
Shutdown Case
In this case it is where at every level of output the
Average Variable cost
is greater that the
Price
so the best action would be to shut down.
:arrow_right: MR = (P) = MC
Pure Monopoly
helps with the study of its own sake and the insight it provides about monopolistic competition and oligopoly. These two market combined has characteristics of both pure competition and pure monopoly.
Legal barriers to enter consists of
patents
and
licenses
.
Pure Monopoly can increase sales only by charging a lower price :arrow_right: Marginal Revenue is Less Than Price.
The Monopolist is a Price Maker and sets prices in the Elastic Region of demand.
Shutdown case : In pure monopoly when the firm's producing is preferable to shutting down it will produce where MR = MC.
