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LRAC
SRAC2
SRAC1
SRAC3
Costs
LRAC
Output
fig
Economies of scope
If a single firm can jointly produce goods X and
Y more cheaply that any combination of firms
could produce them separately, then the
production of X and Y is characterized by
economies of scope.
- occur when there are cost-savings arising from
production of range of products/by-products.
- depends on management structure,
administration systems and marketing
departments.
Break-Even Analysis
TR (p = Rs2)
Costs/Revenue
Profit
TC
VC
Loss
FC
Q1
Output/Sales
Market Structure
Market?
Components of Market
Sellers
Buyers
Product
Price
Exchange
Classification of Market
Based on
Area (Local, Regional, National,)
Volume of business (Wholesale & Retail)
Time (short period, long period,)
Status of sellers (Producers, Wholesalers,
Retailers,)
Regulations (Regulated and Un-regulated)
Competition (Perfect,..,Monopoly)
Imperfect competition
Monopoly
Duopoly
Monopolistic competition
Oligopoly
With product differentiation
Without product differentiation
Classifying Markets
Classifying markets (by degree of
competition)
number of firms
freedom of entry to industry
free, restricted or blocked?
nature of product
homogeneous or differentiated?
Number
of firms
Freedom of
entry
Perfect
competition
Very
large/
Very
many
Unrestricted/
very easy
Monopolistic
competition
Many /
several
Oligopoly
Monopoly
Few
One
Unrestricted/
relatively
easy
Restricted
Restricted or
completely
blocked
Nature of
product
Examples
Implications for
demand curve
faced by firm
Homogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Differentiated
Builders,
restaurants
Downward sloping,
but relatively
elastic
Undifferentiated
Cement
or differentiated
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
Unique
Pure Competition
Monopoly
Duopoly
Oligopoly (undifferentiated)
Oligopoly (differentiated)
Monopolistic Firms
Homogeneous Product
Pure
Market
Non-intervention of Government
Market economy
P
S
Pe
D
O
Q (millions)
Industry
Price
Total
Revenue
Average
Revenue
Marginal
Revenue
12
18
24
30
36
42
P=AR=MR
P = AR = MR
Qe
Market Supply
and Demand
Perfect Competition
Short-run equilibrium of the firm
Price
given by market demand and supply
Output
Where MC=MR and MC cuts MR from below
Profit
= TR-TC
(AR AC) Q
possible supernormal profits
P
S
Pe
D = AR
= MR
AR
O
Q (millions)
Equilibrium Point
-MC=MR=Price
- MCDcut MR from below &
O after
MC must be raising
Equilibrium Point
(a) Industry
Qe
Q (thousands)
(b) Firm
P
S
Pe
Super Normal
Profit
Rs
(AC < Price)
MC
D = AR
= MR
AR
AC
D
O
O
Q (millions)
(a) Industry
AC
Qe
Q (thousands)
(b) Firm
AC
P1
AC
MC
D1 = AR1
AR1
= MR1
D
O
O
Q (millions)
(a) Industry
Qe
Q (thousands)
(b) Firm
Normal Profit
P
S
Normal Profit
MC = MR
RsAC = AR
MC
AC
P2
D2 = AR2
AR2
= MR2
D2
O
O
Q (millions)
(a) Industry
Q (thousands)
(b) Firm
P
S
AC
MC
AVC
P2
D2 = AR2
AR2
= MR2
D2
O
O
Q (millions)
(a) Industry
Q (thousands)
(b) Firm
Perfect Competition
Short-run equilibrium of the firm (cont.)
short-run supply curve of firm
the MC curve
Perfect Competition
The long run
long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR
P
S1
Se
LRAC
P1
AR1
D1
PL
ARL
DL
D
O
O
Q (millions)
(a) Industry
QL
Q (thousands)
(b) Firm
(SR)MC
(SR)AC
LRAC
DL
AR = MR
MONOPOLY
Types of Monopoly
Government-created monopolies- monopolies
arise because the government has given one
person or firm the exclusive right to sell some
good or service.
Eg. patent and copyright laws
Natural monopoly- a monopoly that arises
because a single firm can supply a good or
service to an entire market at a smaller cost
than could two or more firms.
OUTPUT
PRICE
TOTAL
AVERAGE MARGINAL
REVENUE REVENUE REVENUE
10
10
10
10
18
24
28
30
30
28
-2
24
-4
Output-price determination
A o opolists profit a i isi g le el of output
is determined where marginal revenue equals
marginal cost (MR=MC). It then uses the demand
curve to find the price that will induce consumers
to buy that quantity.
Profit Maximisation
At low levels of output say Q1, MC is less than
MR, then the firm can increase profit by
producing more units.
At high levels of output say Q2, MC is greater
than MR, then the firm can raise profit by
reducing production.
Price Discrimination
First degree
Second degree
Third degree
Consumer surplus
Amount that buyers are willing to pay for a good
minus the amount they actually pay for it.
Or the difference between this willingness to
pay and the market price.
The area below the demand curve and above
the price measures the consumer surplus in a
market
Price Discrimination
Price discrimination- the business practice of
selling the same good at different prices to
different customers.
First-degree: the fir is a are of ea h u ers
demand curve.
Second-degree: the firm charges a different
price, depending on the quantity each buyer
purchases.
Third-degree: the firm breaks buyers into groups
based upon their price elasticity of demand.
Note:
In first degree case: different prices
charged for different consumers
In second degree case: different prices
charged for different quantities (for same
consumer)
MONOPOLISTIC COMPETITION
Monopolistic Competition
Features
Number of buyers and sellers are many, all of
whom are small
Freedom of entry and exit
Perfect information
Differentiated products
Attributes that differentiate products need
not be real(packaging , quality)
Monopolistically Competitive SR
Rs
MC
22
18
14
10
6
2
ATC
AR
MR
1
10
Quantity
Monopolistically Competitive SR
Rs
MC
22
18
14
10
6
2
ATC
AR
MR
1
10
Quantity
Monopolistically Competitive SR
Rs
MC
22
18
14
10
6
2
ATC
AR
MR
1
10
Quantity
Monopolistically Competitive SR
Rs
MC
22
18
14
10
6
2
ATC
AR
MR
1
10
Quantity
Monopolistically Competitive
Fir s Pri e, Qua tit , a d Profit
Long Run
Monopolistically Competitive LR
Rs
MC
22
18
14
10
6
2
ATC
AR
MR
1
10 Quantity
Monopolistically Competitive LR
Rs
MC
22
18
14
10
6
2
ATC
AR
MR
1
10 Quantity