 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

Characteristics of Perfect Competition Examples of PC Characteristics of Monopoly Examples of M

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?? HallensteinsASB Bank Fish and chip storeWellington Trains Sheep farmerStadium Food Petrol stationTuck Shop

Perfect Competitor - Costs

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.

1.Give 2 examples of the characteristics of Perfect Competitors. 2.True or false, The demand curve for a perfect competitor is perfectly inelastic 3.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.

MC

MC AC

MC AC

MC AC

I just made a million dollars!!!! Yehaaaah!

MC 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!

MC What happens to PC sub-normal profits in the long- run? Where will profits return to in the long-run?

I am a Price Makerrrrrrrrr

P($)QTRARMR Draw the Revenue curves. What are the differences in the curve?

MC

MC MCAC Super- Normal Profits Sub-Normal Profits Normal Profits

MC MCAC Super- Normal Profits Sub-Normal Profits Normal Profits

MC MCAC Super- Normal Profits Normal Profits I am the market. You shall not enter

Allocative Efficiency

S D 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.

S D

MC/S

MC/S

Allocative Efficiency

MC/S

VS

A business that is able to supply the whole market at a lower price than two or more firms.  Natural monopolies are entire industries not just single firms  Usually involve some sort or network or infrastructure  High initial start up costs act as the barrier to entry in the market

Natural Monopoly High set up costs, low marginal cost! Normal Monopoly Market 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 Revenu e 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

What if more companies produced rail travel? This isn’t an efficient use of our resources

Natural monopolies produce at a lower cost than 2 or more firms! But they want to maximise their profits!!!!! Output Revenu e AR/P/D MR MC/S S = D MC = AR MC = MR

Output Revenu e 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! CS PS

AR/P/D Output Revenu e MR MC/S AC

AR/P/D Output Revenue MR MC/S AC 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

Output Revenue MR MC/S AR/P/D AC Regulate 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