Economics Unit 7 Notes

Competition April-24-09 8:18 AM

Competition Perfect Competition

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There are many sellers in this market Sellers have no control over price The sellers are all price takers Price is determined by interaction of demand and supply Goods that are sold similar in nature No restriction t enter this market Marginal revenue curve is flat Price = marginal revenue e.g. Farmers Monopolistic Competition

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There are a lot of sellers in this market, not as many as perfect competition Sellers have a little control over price Products are similar, but can be different in packaging and style There are few restrictions for entry Competition occurs through advertising Price > marginal revenue E.g. Restaurants, convenience stores Oligopoly Competition

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There are a few sellers in the market place, 3-10 Have a fair amount of control over price Products are different in model or style, example is cars There are many restrictions in this area by the government Competition occurs through advertising Demand curve is kinked E.g. Car manufacturing, telephone companies Monopoly

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Only one seller in the market This seller has complete control over price The product that is sold is very unique Heavy government regulations and restriction of entry into this market Marginal revenue is downward sloping Price is . Marginal revenue E.G. Ontario Hydro

Cost Curves In Determining Output Level Fixed cost - are usually a cost that don't change in the short run. Known as overhead. Costs that do not change when total output produced changes. I.e. RENT Variable Cost - costs that can change in the short run. Known as direct costs. Costs that change directly as output changes. If output increases goes up total variable costs will increase. I.e. Cost of materials

Total cost = variable cost + fixed costs Unit 7 - Types of Competition Page 1

Total cost = variable cost + fixed costs Average variable cost = variable costs / output Average fixed cost = fixed cost / output Average costs = total costs / output

Marginal costs = change in total costs / change in output Total revenue = price * output Marginal revenue = change in total revenue / change in output Profit = total revenue - total costs Fixed Costs : fixed cost does not change as quantity increases

Fixed Cost

Quantity

Variable Costs : Increase as production increases. Will increase at an increasing rate. At first variable cost will increase at a decreasing rate, however when companies reach diseconomies of scale, VC will increase at a increasing rate.

TC Variable Cost

VC

FC

Quantity Total Cost : to draw total cost all we have to do is to add fixed cost curve to variable cost line. For this all we do is translate to variable cost curve up to the fixed cost curve and run parallel to the variable cost curve.

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curve.

Total Revenue : TR is just price * quantity sold. Therefore linear.

Total Revenue

Quantity

Average Fixed Cost - fixed cost does not increase as quantity increase, average fixed cost to decrease as quantity increases

Average Fixed Cost

Quantity

Average Variable Costs - average variable cost will initially decrease until a minimum then increase. Parabola.

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Average Cost Average Variable Cost

Average Variable Cost

Average Fixed Cost

Quantity

Average Cost - add average fixed and variable cost. Average fixed cost is asymptote to the quantity Axis. Marginal Cost - draw marginal cost calculate the change in TC and compare to change in quantity. Decreases then increases it will intersect average variable cost and average cost at their minimum points. This curve ends up being the supply curve.

Marginal Cost Average Cost Marginal Cost Average Variable Cost

Average Fixed Cost

Quantity

Average Revenue - recall TR was a linear line with a positive slope this will cause the average revenue line to be the direct inverse. It will look like demand curve.

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Average Revenue

Quantity

Marginal Revenue - difference between total revenue and divide it by the change in quantity. Steeper slope then demand curve lying on the inside of the demand curve. However, for perfect competition it will be flat.

Marginal Revenue

Marginal Revenue

Average Revenue

Quantity

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Competition Cont. April-28-09 8:25 AM

Price Takers - a firm in perfect competition that cannot influence the price of a good or service. Firms in perfect competition called price takers. Faces perfectly elastic demand. Economic Profit - total revenue - total cost. If costs are greater then revenue, then there is a economic loss, if they equal then it's break-even/normal profit, and if the revenue is greater then it is economic profit. Measured by the total vertical distance between TR and TC Short run - timeframe which each firm has a given plant, and number of firms is fixed. Short run fluctuations such as price. Decide: 1. Produce or shutdown 2. To produce, and what quantity Long run - time frame, each firm change size of its plant and decide whether or not to leave the industry. Other firms can decide to leave or enter. Long run: plant size, and number of firms change. Decide: 1. Whether to increase/decrease plant size 2. Whether to stay in industry or leave

Marginal analysis -compare MR with MC. If MR > MC = Economic Profit - total output increases, economic profit increases If MR < MC = Economic Loss - Profit decreases if output increases, and Economic profit increases if output decreases If MR = MC = Economic Profit is maximized. Profit Maximizing Output

MC MR & MC

Profit Maximization Point

Economic Loss MR

Profit

Quantity

Three Possible Profit Outcomes in the Short Run ATC = Average Total Cost Normal Profit MC

ATC

Price & Cost MR Unit 7 - Types of Competition Page 6

Normal Profit MC

ATC

Price & Cost MR

8

Quantity

Economic Profit MC Price & Cost

ATC

Profit

MR

9

Quantity

Economic Loss MC

ATC

Price & Cost Loss

MR

7

Quantity

If price = minimum average total cost = break even. If Price > ATC then economic profit, if Price < ATC then economic loss. Shutdown Point - when the output and price at which the firm covers its total variable cost. AKA BREAK EVEN

Unit 7 - Types of Competition Page 7

MC

ATC

Price & Cost

MR2 MR1 17

MR0 Shutdown Point

7

Quantity

Short run supply curve S Price

17 T 7 Quantity Made up by MC curve at all points above minimum average cost and the vertical axis at all prices below minimum AVC. Short run industry supply curve - shows the quantity supplied by the industry at each price when the plant size and number of firms are constant. Quantity supplied is the sum of quantities supplied y all firms in the industry at that price.

Industry Supply Curve Price S1

17

7 Quantity

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If at shutdown, some firms will produce 7 per day, others 0.

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Monopolistic April-30-09 8:48 AM

Market Power - ability to influence the market, and in particular the market price, by influencing the total quantity Monopoly - industry that produces a good or service which no substitute, and one supplier protected by a barrier preventing entry. 2 distinct features - No close substitutes - Barriers to entry ○ Legal or natural constraints that protect a firm from competitors - Legal Barriers ○ Legal monopoly is a market in which competition and entry are restricted by the granting of a public franchise, government licence, patent, or copyright ○ Public franchise is exclusive rights to supply good or service ○ Patents ○ Copyrights - Natural Barriers ○ Natural monopoly ○ Industry which one firm can supply the entire market at a lower price than two or more firms can NATURAL MONOPOLY

Price

ATC

D

Quantity

Monopoly Price-Setting Strategies - Price discrimination ○ Practise of selling different units of a good or service for different prices. ○ Different customers pay different prices ○ Limited to monopolies that sell services that cannot be resold - Single Price ○ Firm that sell each unit of output at the same price to all customers A Single Price Monopoly's Output and Price Decision

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A Single Price Monopoly's Output and Price Decision - Price and marginal revenue Demand and Marginal Revenue

MR

Demand

Marginal Revenue and Elasticity - Single price monopoly marginal revenue is related to the elasticity demand for its good In a monopoly, demand is always elastic.

Intercept of MR and MC = optimum output Change in Demand - Increase in demand causes a rise in price and output and higher total profits for monopolist - A change in demand will cause a change in price, output and profits Oligopoly - Rival firms follow price cut make demand inelastic, but firms are assumed not follow a price increase (making demand relatively elastic)

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Oligopoly May-04-09 8:30 AM

Oligopoly -market structure that small number of firms compete

Kinked Demand Curve Model For oligopoly 1. If it raises its price, others will not follow 2. If it cuts its price, so will the other firms

MC 1 P MC 0

D MR Q

Dominant Firm Oligopoly

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Price s 10

Quantity

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Extra Notes May-05-09 7:53 PM

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