providing an explanation of: pricing and output decisions for perfectly competitive and/or...
TRANSCRIPT
3.2 Efficiency of the market structures using marginal
analysis
providing an explanation of:
pricing and output decisions for perfectly competitive and/or monopolist firms using marginal analysis
efficiency of a market structure
impact of a change in a market on the short and/or long run pricing and/or output decisions of a firm using marginal analysis
the impact of a change in a market on the short and/or long run pricing and/or output decisions of a firm using marginal analysis
a government policy to improve the efficiency of a monopoly market
What is in this topic?
Marginal analysis refers to using marginal revenue and marginal cost to determine the output and pricing decisions of firms. This includes demonstrating understanding:
• that perfectly competitive firms operate at the profit maximising output where P(=MR) = MC and are allocatively efficient; and/or
• that monopoly firms operate at the profit maximising output where marginal revenue equals marginal cost (MR = MC) but are allocatively inefficient.
What is in this topic?
Generally firms will operate differently depending on the amount of other firms
they compete with!
Huh! I am the only seller of these arrows! I will charge what I
want!
I am your twin brother and I will sell them too! Ha
ha ha….
Dam! You will take my customers I
am going to have to do something about that! I will sell mine at 50%
off!
Ok. I will sell mine at 60% off!
Markets and behaviour?
Types of markets
Monopoly
Monopsony
Perfect competitor
Find!!!!!!!!!!!
Characteristics of Perfect Competition
Examples of PC
Characteristics of Monopoly
Examples of M
Reveiw
Monopoly or Perfect Competitor?Characteristics of a perfectly competitive firm• Large number of buyers and sellers
• Perfect knowledge exists
• Firms are “price takers”
• Homogenous products (goods are exactly the same)
• No barriers to entry and exit in the industry.
Perfect Competitor? Monopoly??Hallensteins ASB BankFish and chip store Wellington TrainsSheep farmer Stadium FoodPetrol station Tuck Shop
Removing the smoke and mirrors
Perfect Competitor - Costs
Apple Revenue
• For a perfect competitor AR=MR=P=D.
• They face a horizontal demand curve because their supply is relatively small compared to the market supply.
• Therefore they are a price taker.
AR = MR = P = D
Market for Apples
Individual Producer Apples
Revenue plus CostsPerfect
Competitor
Book workPg85-86 Q 1-4
Review Quiz1. Give 2 examples of the characteristics of
Perfect Competitors.2. True or false, The demand curve for a perfect
competitor is perfectly inelastic3. Profit maximising position for a perfect
competitor is AR=MR True or false?4. Give an example of a perfect competitor.5. Name the concept which suggests that an
individual perfect competitor is to small to influence market price.
Perfect Competitor ProfitsMarket IndividualMC
Perfect Competitor ProfitsShort-run MC
AC
MC
AC
Perfect Competitor ProfitsShort-run
MC
AC
Perfect Competitor ProfitsShort-run/long-run
Long-run vs Short-run
The Key Characteristic
I just made a million
dollars!!!! Yehaaaah
!
Long-runMarket IndividualMC
What happens to PC super-normal
profits in the long-run? Where will profits return
to in the long-run?
Darn gonit I
just lost 1 million dollars!
Long-runMarket IndividualMC
What happens to PC sub-normal profits in the
long-run? Where will profits return
to in the long-run?
Monopoly
Reminder
One Key Characteristic I am a Price
Makerrrrrrrrr
P($) Q TR AR MR
12 1
10 2
8 3
6 4
4 5
Revenue Exploration
Draw the Revenue curves.
What are the
differences in the curve?
Curve ExplorationMC
Tell me 1 thing!
Monopoly profit levels
MCMC
Profit for a MonopolySHORT-RUN
AC
Super-Normal Profits
Sub-Normal ProfitsNormal
Profits
Short run vs Long run
MCMC
Profit for a MonopolySHORT-RUN
AC
Super-Normal Profits
Sub-Normal ProfitsNormal
Profits
MCMC
Profit for a MonopolyLONG-RUN
AC
Super-Normal Profits
Normal Profits
I am the market. You shall not
enter
Monopoly and Perfect competitorAllocative Efficiency
Market S
D
A brief lesson Optimal distribution
of goods and services with
consumer preferences in mind.
The price that consumers are willing to pay is
equivalent to their Marginal Utility.
Market S
D
Lets Apply Allocative Efficiency MC/S
MC/S
Lets Apply Allocative Efficiency
Monopoly vs MonopolyAllocative Efficiency
MC/S
Lets see who remembersAllocative Efficiency
VS
What are the differences?
A business that is able to supply the whole market at a lower
price than two or more firms.Points:Natural monopolies are entire
industries not just single firmsUsually involve some sort or network
or infrastructureHigh initial start up costs act as the
barrier to entry in the market
What are the differences?
ComparisonNatural Monopoly
High set up costs, low marginal cost!
Normal MonopolyMarket share and market power!
Can supply the market cheaper than
two or more firms operating in the
market!
Normally create dead weight loss by
restricting quantity or price to make super-
normal profits.
Normal monopolist
Output
Revenue
AR/P/D
MR
MC/S
AC
Relevant range of output
At the relevant range of output, Average Cost is rising!!!!!
For a normal monopolist, they will
not experience Economies of Scale throughout there
relevant output range
MC/S
Natural monopolist
The good and the badNM
What if more companies produced rail travel?
This isn’t an efficient use of our resources
Houston we have a problemNatural monopolies produce at a lower cost than 2 or more firms! But they want to maximise their profits!!!!!
Output
Revenue
AR/P/D
MR
MC/S
Profit Max.
AllocativeEfficiency
S = DMC = AR
MC = MR
Output
Revenue
AR/P/D
MR
MC/S
Pm
Qm
Ps
Qs
Natural Monopolists will produce at MC= MR.
At this position the product is over priced and under produced.
This is not socially desirable!
D.W.L
Houston we have a problem
CS
PS
AR/P/D
Output
Revenue
MR
MC/S
AC
Profit levels!
AR/P/D
Output
Revenue
MR
MC/S
AC
Government Intervention!Regulate so the natural Monopoly produces at MC=AR/S=D.
Price falls and quantity increases! Allocative efficiency achieved! Social optimum and no dead weight loss!
Problem is sub-normal profit is made at this position so may leave the industry at this position.
Government will have to subsidise. This can be a high cost to the Government
Marginal Cost Pricing
Government Intervention!
Output
Revenue
MR
MC/S
AR/P/D
AC
Average Cost PricingRegulate so the natural Monopoly produces at AC=AR
Price falls and quantity will increases! dead weight loss is reduced!
Problem of sub-normal profit is removed and no subsidy is required as the Natural Monopoly will make NORMAL PROFITS!
Problem: Natural Monopoly will inflate their costs so cannot accurately price at AC