Documente Academic
Documente Profesional
Documente Cultură
Technology Lahore
Che-309
Instructor: Aamir Abbas
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The Meaning of Competition
A perfectly competitive market has the
following characteristics:
There are many buyers and sellers in the
market.
The goods offered by the various sellers are
largely the same.
Firms can freely enter or exit the market.
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The Meaning of Competition
As a result of its characteristics, the perfectly
competitive market has the following
outcomes:
The actions ofany single buyer or seller in the
market have a negligible impact on the market
price.
Each buyer and seller takes the market price as
given.
Thus, each buyer and seller is a price taker.
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Revenue of a Competitive Firm
Total revenue for a firm is the selling price
times the quantity sold.
TR = (P X Q)
TR= Total revenue
P=Price/unit
Q= No of units or quantity
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Average and marginal revenue
Average revenue is total revenue (P x Q)
divided by the quantity (Q)
Therefore, for all firms, average revenue equals
the price of the good.
Marginal revenue is the change in total revenue
from an additional unit sold.
For competitive firms, marginal revenue equals
the price of the good.
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Total, Average, and Marginal Revenue for
a Competitive Firm
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Profit Maximization for the Competitive
Firm
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Profit Maximization for the Competitive
Firm...
Costs The firm maximizes profit
and by producing the quantity
Revenue at which marginal cost
equals marginal revenue.
MC
MC2
ATC
P=MR1 P = AR = MR
AVC
MC1
0 Q1 QMAX Q2 Quantity 10
Profit Maximization for the
Competitive Firm
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Profit Maximization for the
Competitive Firm
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The Interaction of Firms and Markets
in Competition
Price Firm Market
And Price S1
Costs MC
A
a S2
$10
P=MR0
B
b ATC
ATC c
=$7 P=MR1
AVC
d
D0
q4 q3 q2 q1 Q1 Q2
10 units
qF QM
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Monopoly
While a competitive firm is a price taker, a
monopoly firm is a price maker.
A firm is considered a monopoly if . . .
It is the sole seller of its product.
Its product does not have close
substitutes.
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Why Monopolies Arise
Barriers to entry have three sources:
Ownership of a key resource.
This tends to be rare. De Beers is an example
The government gives a single firm the exclusive
right to produce some good.
Patents, Copyrights and Government Licensing.
Costs of production make a single producer more
efficient than a large number of producers.
Natural Monopolies
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Monopoly versus Competition
Monopoly Competitive Firm
Is the sole producer Is one of many
Has a downward- producers
sloping demand curve Has a horizontal
Is a price maker demand curve
Reduces price to Is a price taker
increase sales Sells as much or as
little at same price
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Demand Curves for Competitive and Monopoly Firms
Demand
Demand
Imperfect competition
includes industries in which
firms have competitors but do
not face so much competition
that they are price takers.
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Types of Imperfectly Competitive
Markets
Oligopoly
• Only a few sellers, each offering a similar
or identical product to the others.
Monopolistic Competition
• Many firms selling products that are
similar but not identical.
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Summary
Firm’s profit in terms of economist and
accountant.
Revenue and total cost.
Diminishing marginal product.
Fixed and variable cost.
Total, average and marginal costs.
Long run ATC curves
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