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Imperfect Competition (Chapter 12), Perfect Competition and Profit…
Imperfect Competition (Chapter 12)
Imperfect Competition
: A market structure in which many firms sell a differentiated product, entry is relatively easy, each firm has some control over its product price, and there is considerable nonprice competition.
Characterisitcs
Large number of sellers
Easy Entry and exit
Advertising
Differentiated products
Product Attributes
Service
Location
Some control over price
Brand Names and packaging
Monopolistic competition and efficiency
: Productive efficiency means that the firm is producing in the least costly way and is found when P =minimum ATC. Allocative efficiency means that the firm is producing the right amount of product and is found when P = MC. Neither condition is met in monopolistic competition.
Neither productive nor allocative efficiency
: A monopolistic competitor achieves neither productive nor allocative efficiency.
Productive efficiency is not realized because production occurs where ATC exceeds the minimum ATC.
Allocative efficiency is not achieved because the product price exceeds the marginal cost.
Excess Capacity
: There is excess capacity in the industry which means that the plant and equipment are underutilized because firms are producing below minimum ATC output.
Price and output in Monopolistic Competition
The firm's demand curve: The demand curve faced by a monopolistically competitive seller is highly, but not perfectly elastic.
The Short Run: Profit or Loss
Short-run profit: Will induce new firms to enter, eventually eliminating economic profit.
Short-run losses: Will cause an exit of firms until normal profits is restored.
The Long Run: Only a Normal Profit
After such entry and exit, the price will settle in to where it just equals ATC at the MR=MC. At this price and output, the monopolistic competitor earns only a normal profit, and the industry is in long-run equilibrium.
Perfect Competition and Profit Maximization (Chapter 10)
Perfect Competition
Basic Market Models
Pure Monopoly
: A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.
Monopolistic Competition
: A market structure in which many firms sell a differentiated product, entry is relatively easy, each firm has some control over its product price, and there is considerable nonprice competition.
Oligopoly
: A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.
Pure Competition
: A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers.
Characterisitcs and occurence
Very large numbers
Standarized product
Price "takers"
Free entry and exit
Demand as seen by Purely Competitive seller
Perfectly Elastic Demand
: The demand schedule faced by the individual firm in a purely competitive industry is perfectly elastic (horizontal) at the market price.
Average, Total and Marginal Revenue
: Marginal revenue and average revenue for a purely competitive firm coincide with the firm's demand curve- total revenue rises by the product price for each additional unit sold.
Profit Maximization in the Short Run
Total-Revenue to Total-Cost Approach: If price P is greater than the minimum average variable cost, the firm will produce output where MR (=P) =MC to either maximize its profit (if price exceeds minimum ATC) or minimize its loss (if price lies between minimum AVC and minimum ATC).
Break-even point: An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit.
Marginal-Revenue to Marginal-Cost Approach:
Uses the MR=MC rule, a principle that a firm that a firm will use to either maximize profit or minimize loss by producing output at which MR=MC, provided product price is equal to or greater than AVC. For a price taker, P=MR.
Important features:
The firm will shut down unless MR at least meets MC (MR>MC; gain more revenue from selling than it would add to cost by producing it).
Profit maximization in all market structures can be restated as P=MC.
Profit-Maximizing Case
: The MR = MC output
enables the purely competitive firm to maximize profits or to minimize losses.
The Shutdown Case
: If MR is not equal to AVC or exceeds AVC- the firm will shut down rather than produce the MR=MC output.
Loss-Minimizing Case
: Firm still continues to produce because MR> minimum AVC. If price P exceeds the minimum AVC but is less than ATC, the MR=MC output will permit the firm to minimize its losses.
Marginal Cost and Short-Run Supply
Generalized Depiction
: This graph generalizes the MR=MC rule and the relationship between short-run production costs and the firm's supply behavior.
Changes in Supply
: Changes in factors such as prices of variable inputs or in technology will alter costs and shift the MC or short-run supply curve to a new location.
Diminishing returns, production costs, and Product Supply
Firm and industry: Equilibrium Price
The short-run supply curve is established by applying the MR (=P) =MC rule
Market equilibrium Price is the price at which total quantity supplied of the product equals the total quantity demanded.
To determine the equilibrium price, we first need to obtain a total supply and a total demand schedule.
Firm vs Industry
: Market supply in a competitive industry is the horizontal sum of the individual supply curves of the firms in the industry. The market equilibrium price is determined where the industry's market supply curve intersects the industry's market demand curve.
Market Price and profits
: If price P is greater than minimum average variable cost, the firm will produce the amount of output where MR (=P) =MC in order to maximize its profit (if price exceeds minimum ATC) or minimize its loss (if price lies between minimum AVC and minimum ATC).
