Economics Unit 7 Notes

8/14/2019 Economics Unit 7 Notes

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Competition

Perfect Competition

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

There are a lot of sellers in this market, not as many as perfect competition-

Sellers have a l ittle control over price-

Products are simi lar, 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

There are a few sel lers 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

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

CompetitionApril-24-09

8:18 AM

Unit 7 - Types of Competition Page 1


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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

Quantity

Fixed

Cost

Variable Costs : Increase as production increases. Wil l 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.

Variable

Cost

Quantity

VC

FC

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.

TC



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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

FixedCost

Quantity

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

Parabola.



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Average

Variable

Cost

Quantity

Average

Variable Cost

Average Fixed Cost

Average Cost

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

Quantity

Average

Variable Cost

Average Fixed Cost

Average Cost

Marginal Cost

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

Quantity

Average RevenueMarginalRevenue



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Price Takers - a f irm 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 economicloss, 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:

Produce or shutdown1.

To produce, and what quantity2.

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 fi rms change.Decide:

Whether to increase/decrease plant size1.

Whether to stay in industry or leave2.

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

MR & MC

MC

MR

Profit Maximization

Point Economic Loss

Profit

Quantity

Three Possible Profit Outcomes in the Short Run

Normal Profit

Price

& Cost

ATCMC

ATC = Average Total Cost

Competition Cont.April-28-09

8:25 AM



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Quantity

Price

& Cost

MR

ATCMC

Economic Profit

Quantity

Price

& Cost MR

ATCMC

Economic Loss

Quantity

Price

& Cost

MR

ATCMC

9

8

7

Loss

Profit

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



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Quantity

Price

& Cost

MR0

ATCMC

Shutdown Point

MR1

MR2

Short run supply curve -

Quantity

Price

S

T

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

Quantity

17

7

S1

7

17

7

17



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



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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 bya barrier preventing entry.

2 distinct features

No close substitutes-

Legal or natural constraints that protect a firm from competitors

Barriers to entry-

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

Legal Barriers-

Natural monopoly

Industry which one firm can supply the entire market at a lower price than two or more firms can

NATURAL MONOPOLY

Natural Barriers-

Price

Quantity

ATC

D

Monopoly Price-Setting Strategies

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

Price discrimination-

Firm that sell each unit of output at the same price to all customers

A Single Price Monopoly's Output and Price Decision

Single Price-

MonopolisticApril-30-09

8:48 AM



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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 fol low a price increase

(making demand relatively elastic)

-



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Oligopoly -market structure that small number of firms compete

Kinked Demand Curve Model

For oligopoly

If it raises its price, others will not follow1.

If it cuts its price, so wil l the other firms2.

MR

D

MC 0

MC 1

P

Q

Dominant Firm Oligopoly

OligopolyMay-04-09

8:30 AM



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s 10

Quantity

Price



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Extra NotesMay-05-09

7:53 PM



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Economics Unit 7 Notes

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