PERFECT AND IMPERFECT COMPETITION
average, total and marginal revenue formulae:
Perfect competition
pure competition
a market structure in which a very large number of firms sell a standardized product
characteristics of pure competition
number of firms: very large number
type of product: standardized
control over price: none; known as price takers
conditions of entry: very easy; no obstacles
non price competition: none
example : agriculture
perfectly elastic demand: firms dont need to lower its price to increase sales volume
imperfect competition
oligopoly
monopolistic competition
a market structure where many firms sell differentiated products
number of firms: many firms
type of product:differentiated products
control over price: some, but within rather narrow limits
non price competition: considerable emphasis on advertising, brand names, trademarks
examples: retail trade, dresses, shoes
small market shares: small percentage of market and limited control over price
conditions of entry: relatively easy
no collusion
independant factor: no interdependance among firms, each can have its own price policy
excess capacity: plan resources that are underused when imperfectly competitive firms produce less output than that associated with achieving min average total cost
demand curve is highly but not perfectly elastic
number of firms: few
type of product: standardized or differentiated
control over price: limited by mutual inter-dependence
conditions of entry: significant obstacles
nonprice competition: a great deal especially with product differentiation
examples: steel, auto, form implements
monopoly
number of firms: one
types of products: unique, no close substitues
control over price: considerable
conditions of entry: blocked
non price competition: mostly public relations, advertising
examples:local utilities
average revenue
revenue per unit: AR= TR/Q=P
Total revenue: total revenue the firms get for the total amount of that unit
TR=PXQ
Marginal revenue: extra revenue from 1 more unit
MR= CHANGE IN TR / CHANGE IN Q
profit maximisation
the marginal revenue = marginal cost rule
firm considers 3 questions
should the firm produce? if so, what amount? what economic profit/loss will be realized?
minimizes loss
total revenue- total cost approach
competitive producer wishes to produce at the output level where TR exceeds TC by the greatest amount
TR<TC= LOSS
TR>TC=PROFIT
break-even point: an output at which a firm makes a normal profit[TR=TC] but not an economic one
principal that a firm will maximize its profits and minimize its losses by producing the output at which MR=MC provided the product price is equal or greater than average variable cost
short run supply:a supply curve that shows the quantity of a product that afirmin purely competitive industry will offer to sell at various prices in the short run
upsloping line