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Profit Maximisation under Perfect Competition

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oligopoly. Features of the four market structures. Features of the four market structures ... oligopoly. Structure conduct performance. Perfect Competition ... – PowerPoint PPT presentation

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Title: Profit Maximisation under Perfect Competition


1
Profit Maximisation under Perfect Competition and
Monopoly
2
Alternative Market Structures
  • Classifying markets (by degree of competition)
  • number of firms
  • freedom of entry to industry
  • free, restricted or blocked?
  • nature of product
  • homogeneous or differentiated?
  • nature of demand curve
  • degree of control the firm has over price

3
Alternative Market Structures
  • The four market structures
  • perfect competition
  • monopoly
  • monopolistic competition
  • oligopoly

4
Features of the four market structures
5
Features of the four market structures
6
Features of the four market structures
7
Features of the four market structures
8
Features of the four market structures
9
Features of the four market structures
10
Alternative Market Structures
  • The four market structures
  • perfect competition
  • monopoly
  • monopolistic competition
  • oligopoly
  • Structure ? conduct ? performance

11
Perfect Competition
  • Assumptions
  • firms are price takers
  • freedom of entry of firms to industry
  • identical products
  • perfect knowledge
  • Distinction between short and long run
  • normal profits
  • supernormal profits

12
Perfect Competition
  • Short-run equilibrium of the firm
  • Price
  • given by market demand and supply
  • Output
  • where P MC
  • Profit
  • (AR AC) Q
  • possible supernormal profits

13
Short-run equilibrium of industry and firm under
perfect competition

P
O
O
Qe
Q (thousands)
Q (millions)
(a) Industry
(b) Firm
14
Loss minimising under perfect competition
P

S
D
O
O
Q (thousands)
Q (millions)
(a) Industry
(b) Firm
15
Short-run shut-down point
P

AC
MC
S
O
O
Q (thousands)
Q (millions)
(a) Industry
(b) Firm
16
Perfect Competition
  • Short-run equilibrium of the firm (cont.)
  • short-run supply curve of firm
  • the MC curve
  • Short-run supply curve of industry
  • sum of supply curves of firms

17
Perfect Competition
  • The long run
  • long-run equilibrium of the firm
  • all supernormal profits competed away

18
Long-run equilibrium under perfect competition
Profits return to normal
Supernormal profits
New firms enter
P

O
O
QL
Q (thousands)
Q (millions)
(a) Industry
(b) Firm
19
Perfect Competition
  • The long run
  • long-run equilibrium of the firm
  • all supernormal profits competed away
  • LRAC AC MC MR AR

20
Long-run equilibrium of the firm under perfect
competition

O
Q
21
Perfect Competition
  • The long run
  • long-run equilibrium of the firm
  • all supernormal profits competed away
  • LRAC AC MC MR AR
  • long-run industry supply curve

22
Perfect Competition
  • The long run
  • long-run equilibrium of the firm
  • all supernormal profits competed away
  • LRAC AC MC MR AR
  • long-run industry supply curve
  • incompatibility of economies of scale with
    perfect competition

23
Perfect Competition
  • The long run
  • long-run equilibrium of the firm
  • all supernormal profits competed away
  • LRAC AC MC MR AR
  • long-run industry supply curve
  • incompatibility of economies of scale with
    perfect competition
  • Does the firm benefit from operating under
    perfect competition?

24
Monopoly
  • Defining monopoly
  • importance of market power
  • concentration ratios

25
Concentration ratios in the UK
26
Monopoly
  • Barriers to entry
  • economies of scale
  • product differentiation and brand loyalty
  • lower costs for an established firm
  • ownership/control of key factors or outlets
  • legal protection
  • mergers and takeovers
  • aggressive tactics

27
Monopoly
  • The monopolist's demand curve
  • downward sloping
  • MR below AR

28
AR and MR curves for a monopoly
Q (units)
P AR ()
8 7 6 5 4 3 2
1 2 3 4 5 6 7
AR, MR ()
AR
Quantity
29
AR and MR curves for a monopoly
Q (units)
P AR ()
TR ()
MR ()
8 7 6 5 4 3 2
8 14 18 20 20 18 14
1 2 3 4 5 6 7
6 4 2 0 -2 -4
AR, MR ()
AR
Quantity
MR
30
Monopoly
  • Equilibrium price and output
  • MC MR

31
Profit maximising under monopoly

Qm
O
Q
32
Monopoly
  • Equilibrium price and output
  • MC MR
  • measuring level of supernormal profit

33
Profit maximising under monopoly

Qm
O
Q
34
Profit maximising under monopoly

MC
MR
Qm
O
Q
35
Profit maximising under monopoly

MC
AR
AC
MR
Qm
O
Q
36
Monopoly
  • Equilibrium price and output
  • MC MR
  • measuring level of supernormal profit
  • Monopoly versus perfect competition

37
Monopoly
  • Equilibrium price and output
  • MC MR
  • measuring level of supernormal profit
  • Monopoly versus perfect competition
  • lower output at a higher price

38
Equilibrium of industry under perfect
competition and monopoly with the same MC curve

Monopoly
P1
Q1
O
Q
39
Equilibrium of industry under perfect
competition and monopoly with the same MC curve

MC ( supply under perfect competition)
Comparison with Perfect competition
P1
AR D
MR
Q1
Q2
O
Q
40
Monopoly
  • Equilibrium price and output
  • MC MR
  • measuring level of supernormal profit
  • Monopoly versus perfect competition
  • lower output at a higher price
  • short run and long run

41
Monopoly
  • Equilibrium price and output
  • MC MR
  • measuring level of supernormal profit
  • Monopoly versus perfect competition
  • lower output at a higher price
  • short run and long run
  • costs under monopoly

42
Equilibrium of industry under perfect
competition and monopoly with different MC curves

MCmonopoly
P1
AR D
MR
O
Q
Q1
43
Equilibrium of industry under perfect
competition and monopoly with different MC curves
MC ( supply)perfect competition

MCmonopoly
P2
P1
x
P3
AR D
MR
O
Q2
Q3
Q
Q1
44
Monopoly
  • Equilibrium price and output
  • MC MR
  • measuring level of supernormal profit
  • Monopoly versus perfect competition
  • lower output at a higher price
  • short run and long run
  • costs under monopoly
  • innovation and new products

45
Contestable Markets
  • Importance of potential competition
  • low entry costs
  • low exit costs
  • Perfectly contestable markets
  • Contestable markets natural monopolies
  • The importance of costless exit
  • absence of sunk costs
  • hit-and-run competition
  • Assessment of the theory
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