ANALYSIS OF PERFECTLY COMPETITIVE MARKETS, IMPERFECT COMPETITION AND MONOPOLY Chapter 2 Matakuliah: F Economic Analysis Tahun: 2009
Bina Nusantara University 3 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 Firm Profit 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. Bina Nusantara University 4
Perfect Competition Perfect 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. Bina Nusantara University 5
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. Bina Nusantara University 8
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 Efficiency Allocative 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. Bina Nusantara University 16
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 Competition If 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. Bina Nusantara University 19
Acid Test for Imperfect Competition Is Downward Tilt of Firm’s Demand Curve
Varieties of Imperfect Competitors 1.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 Imperfection b.Barriers to Entry Bina Nusantara University 21
Market Structure Depends on Relative Cost and Demand Factors
Marginal Revenue Curve Comes from Demand Curve