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Pure Competition

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Pure Competition Chapter 10 Four Market Models ... automobiles Retail Agriculture Examples Public relations advertising Product differentiation Advertising None ... – PowerPoint PPT presentation

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Title: Pure Competition


1
Pure Competition
  • Chapter 10

2
Four Market Models
  • Pure Competition (ch 10)
  • Pure Monopoly (ch 11)
  • Monopolistic Competition (ch 12)
  • Oligopoly (ch 12)

3
Characteristic Pure Competition Monopolistic Competition Oligopoly Pure Monopoly
of firms Large number Many Few One
Type of Product Standardized Differentiated Either Unique no substitutes
Control over Price None Some Collusion Considerable
Conditions of Entry Very easy Relatively easy Obstacles Blocked
Nonprice competition None Advertising Product differentiation Public relations advertising
Examples Agriculture Retail Steel, automobiles Utilities
4
Pure Competition
  • Characteristics
  • Very large numbers
  • Standardized product
  • price takers
  • Free entry exit

5
Perfectly Elastic
  • The supply curve of the firm is perfectly
    elastic.
  • Firm cannot obtain a higher price by restricting
    output or lowering price to increase sales
    volume.
  • Market supply is an up sloping supply curve.

6
Revenue Table
Price Quantity TR (P Q) MR (price)
131 0 0 ---
131 1 131 131
131 2 262 131
131 3 393 131
131 4 524 131
131 5 655 131
131 6 786 131
131 7 917 131
131 8 1048 131
131 9 1179 131
131 10 1310 131
7
Maximizing Profits in Short-Run
  • Profit can only be maximized by adjusting their
    output
  • This can only be done by adjusting the amount of
    variable resources used

8
How is Profit Determined?
  • Two Methods
  • Compare total revenue total cost
  • Compare marginal revenue marginal cost

9
  • Break-Even Point - Total revenue (TR) total
    cost (TC)
  • Profit-Maximizing Point- where profit is at its
    largest. This is where the difference between TR
    TC is the greatest.

10
Profit-Maximizing TableUsing TR/TC Approach
Price 131
Quantity TFC TVC TC TR Profit TR-TC
0 100 0 100 0 -100
1 100 90 190 131 -59
2 100 170 270 262 -8
3 100 240 340 393 53
4 100 300 400 524 124
5 100 370 470 655 185
6 100 450 550 786 236
7 100 540 640 917 277
8 100 650 750 1048 298
9 100 780 880 1179 299
10 100 930 1030 1310 280
11
MRMC Rule
  • Profits can be maximized or losses can be
    minimized by producing at the output at which
    marginal revenue equals marginal cost.

12
Profit-Maximizing TableUsing MR/MC Approach
Price 131
Q TC TR MC MR
0 100 0 --- ---
1 190 131
2 270 262
3 340 393
4 400 524
5 470 655
6 550 786
7 640 917
8 750 1048
9 880 1179
10 1030 1310
13
Shutdown Case
  • If price falls below the minimum average variable
    cost, the firm will minimize its losses in the
    short run by shutting down.

14
Short-Run Supply
  • The portion of the firms marginal-cost curve
    lying above its average-variable cost curve is
    its short-run supply curve.
  • Solid segment of the mc curve is the firms
    short-run supply curve.

15
Long-Run
  • The long-run supply curve for a constant-cost
    industry is horizontal.
  • The long-run supply curve for an increasing-cost
    industry is up sloping.

16
Decreasing Cost Industry
  • Firms experience lower costs as the industry
    expands.
  • Lower production costs reduces price to the
    consumer and helps firms achieve economies of
    scale.

17
Productive Allocative Efficiency
  • Productive -Requires that goods be produced in
    the least costly way.
  • Allocative - Resources are used by firms in a way
    that will yield the mix of products that is most
    wanted by society.
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