ANALYSIS OF PERFECTLY COMPETITIVE MARKETS, IMPERFECT COMPETITION

AND MONOPOLYChapter 2

Matakuliah : F0882 - Economic AnalysisTahun : 2009

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Learning Outcomes

• Supply Behavior of The Competitive Firm• Supply Behavior in Competitive Industries• Special Casesof Competitiveness Markets• Efficiency and Equity of Competitive

Markets• Patterns of Imperfect Competition• Marginal Revenue and Monopoly

Supply Behavior of The Competitive Firm

Behavior of A Competitive FirmProfit Maximization

Why would a firm want to maximize Profits ? Recall that profits equal total revenues minus total cost.

Profit are like the net earnings or take home pay of a business. They represent the amount a firm can pay in dividends to the owners, reinvest in new plant and equipment, or employ to make financial investments. All these activities increase that value of the firm to its owners.

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Perfect CompetitionPerfect competition is the world of price-takers. A perfectly competitive firm sells a homogeneous product (one identical to the product sold by others in the industry). It is so small relative to its market that it cannot affect the market price; it simply takes the price given.

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Demand Curve Is Completely Elastic for a Perfectly Competitive Firm

Implant these key points in your long-term memory

1. Under perfect competition, there are many small firms, each producing an identical product and each too small to affect the market price.

2. The perfect competitor faces a completely horizontal demand (or dd) curve.

3. The extra revenue gained from each extra unit sold is therefore the market price.

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Add All Firms’ Supply Curves to Derive Market Supply

Effect of Increase in Demand on Price Varies in Different Time Periods

Long-Run Industry Supply Depends on Cost Conditions

Constant-Cost Case

Increasing-Cost Case

Factors with Fixed Supply Earn Rent

Backward-Bending Supply Curve

The Concept of EfficiencyAllocative efficiency (or efficiency) occurs when no possible reorganization of production can make anyone better off without making someone else worse off.

Under condition all allocative efficiency, one person’s satisfaction or utility can be increased only by lowering someone else’s utility.

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At Competitive Equilibrium Point E, the Marginal Costs and Utilities of Food Are

Exactly Balanced

Competitive Market Integrates Consumers’ Demands and Producers’ Costs

Definition of Imperfect CompetitionIf firm can appreciably affect the market price of its

output, the firm is classified as an “imperfect competitor”

Imperfect competition prevails in an industry whenever individual sellers have some measure of control over the price of their input.

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Acid Test for Imperfect Competition Is Downward Tilt of Firm’s Demand Curve

Varieties of Imperfect Competitors1. Monopoly : A single seller with complete control

over an industry.2. Oligopoly : the term oligopoly means “ few

sellers”. Few, in this context, can be a number as small as 2 or as large as 10 or 15 firms.

3. Monopolistic Competition : this occurs when a large number of sellers produce differentiated products.

Source of Market Imperfections a. Cost and Market Imperfectionb. Barriers to Entry

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Market Structure Depends on Relative Cost and Demand Factors

Marginal Revenue Curve Comes from Demand Curve