pricing & output decision - market structure. chapter organization introduction to market...
TRANSCRIPT
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PRICING & OUTPUT DECISION
- Market Structure
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Chapter Organization
• Introduction to Market Structure• Perfect Competition• Monopoly• Monopolistic Competition• Oligopoly
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Market Structure
Determinants of market structure• Freedom of entry and exit• Nature of the product-
homogeneous, differentiated• Control over supply/output• Control over price• Barriers to entry
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Classification of market based on nature of competition
MARKET
Perfect competition Imperfect Competition
Pure Perfect Monopoly Oligopoly Monopolistic
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Perfect Competition
Assumptions• Large number of Buyers & Sellers.• Homogeneous product.• Free entry & exist to industry.• No govt. regulation.• Price takers• Perfect Knowledge of market conditions.• Perfect mobility of factors of production.
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• A perfectly competitive market is where agents in the market (buyer&seller) are price taker.
• Price taking behaviors: agents believe that the market price is given and their actions do not influence the market price.
• Examples of Perfect Competition- Financial markets - (stock exchange,
currency market), agriculture
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FIRM-PRICE TAKER
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Equilibrium of firm in short run
(A) TR and TC approach TC
TRC
R
XAXXB
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(B) MR and MC approach
MC
P=AR=MR
X
P
P0
0
e
Xe
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Profit Maximization for a Perfectly Competitive Firm • All firms maximization for a Perfectly Competitive Firm
MR = MC•Since the perfectly competitive firm is a price taker, marginal revenue equals price.
MR = P•Therefore, profits will be maximized where
MR (= P) = MC or P = MC
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Profit Maximization
All firms can maximize profits (or minimize losses) by comparing marginal revenue (MR) with marginal cost (MC)
• If MR > MC, profits are increasing• If MR < MC, profits are decreasing• Therefore, profits must be maximized where
MR=MC
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• Since the perfectly competitive firm is price taker, marginal revenue equals price.
MR= P
• Therefore, profits will be maximized where
MR (=P) = MC or P = MC
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Is the firm making a profit?
For a price taker, price is also equal to the average revenue and we need to compare average total cost with price in order to tell whether the firm is making a profit.
• If P > ATC , the firm is making a profit that is , it is selling its output at mere than its cost.
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•If P < ATC, the firm is losing money
MC
ATC
LossD
C P=AR = MR
0Quantity
Pri
ce ,C
ost,
Rev
enue
E
F
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•If P > ATC, the firm is having super normal profits
MC
ATC
Super Normal ProfitE P=AR = MR
0Quantity
Pri
ce ,C
ost,
Rev
enue
P0
A B
Xe
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•If P = ATC, the firm is having normal profits.
MC ATC
CP=AR = MR
0Quantity
Pri
ce ,C
ost,
Rev
enue
B
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Shut down point
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What if the Firm is Losing Money?
• If a firm is losing money, it has to decide whether to operate at a loss or shut down.• If a firm shuts down, its loss will be equal to the amount of its total fixed costs.• But, if a firm can cover its variable costs, it should continue to operate even though it’s losing money.
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The Shut-Down Condition
•If P < AVCmin , the firm should shut down. Why? Because it’s not covering its variable costs.
•If P > AVCmin , the firm should continue to operate at a loss.Why? Because it will cover its variable costs
•The minimum of average variable cost is called the shutdown price.
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Short run equilibrium of industry
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Long Run Equilibrium - Firm
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Long Run Equilibrium- Industry