Object : To examine the optimal managerial conduct under a variety of market structures. Issues : - Price decision - Ouput decision - Selection of inputs - Plant scale Market Structures : 1. Perfect Competition (Persaingan sempurna) 2. Imperfect Competition(Persaingan tdksempurna) a. Monopoly (Monopoli) b. Monopolistic (Monopolistik) c. Oligopoly (Oligopoli)

-There are many firms, each of which is small relative to the entire market (Agriculture : Corn, wheat, beef, the retail mail order market for comp software and computer memory chips) - The firms have access to the same technologies and produce the similar - Firms do not have market power - No individual firms has a perceptible impact on the market price,quantity, or quality of product produced in the market. - A firm that is the sole producer of good or services in a market - There is a tendency for the seller to capitalize on the monopoly position by restricting output and charging a price above marginal cost. - Because there are no other firms in the market, consumer can not switch to another producer in the face of higher price.

- There are many firms and consumers, however each firms produces a product that is slightly different from the products produced by others. (restaurant, cigarettes, detergen, news paper) - Firm has some control over the price charged for the product. - By rising the price, some consumer will remain loyal, but some consumers will switch to other brands. - a few large firms tend to dominate the market ( airline, automobile, aerosspace industries). - one firm change its price or marketing strategy, not only its own profit but the profit of the others firms in the industry are affected.

The Key conditions for perpect competition : 1.There are many buyers and sellers in the market, each of which is small relative to the market. 2.Each firm in the market produces a homogoneus (identical product) 3.Buyers and seller have perfect information 4.There are no transaction cost. 5.There is free entry into and exit from the market. Price is determined by the interaction of the market supply and demand curve. The market supply and demand curves depend on all buyers and sellers, the market price is outside the control of a single perpectly competetive firm

P Market S D QmQm PePe 0 P Firm D f = P e QfQf Demand at the Market and Firm Levels under Perpect Competition Maximizing Profits TR – TC >>> (Vertical Line) P Cost= C (Q) R = Px Q A B Firms Output Q* Profit maximizing Output Slope MC Slope MR

$ 0 Q* ATC (Q) PePe MC ATCAVC D f = P e = MR Profit PROFIT MAXIMIZATION UNDER PC The profit of PC firm are :  = PQ – C(Q) The FOC for max. profit requires that the marginal profits be zero d  /dQ = P - dC(Q)/dQ = 0 Profit maximizing rule for a firm in PC : P = dC/dQ = MC P Q

QTFCTVCTCAFCAVCACMC Kurva Biaya perunit Jangka Pendek

Fixed Cost Demonstration Problem 1: The cost function for a firm is given by : C(Q) = 5 + Q 2 If the firm sells output in a PC market and others firm in the industry sell output at a price $20, what price should the manager of this firm put on the product? What level of output should be produced to max. profit? How much profit will be earned? Short-Run Operating Losses PePe ATC(Q) L o s s MC ATC AVC D f = P e = MR 0 Q* Firm’s Output $ D f = P e = MR Q* Firm’s Output MC ATC AVC $ PePe AVC(Q) ATC(Q) Loss if produce Loss if shut down AVC(Q)

The firm would lose : ATC (Q*) - P e To Maximise short-run profits, PC firm should produce in the range of increasing marginal cost where P = MC, provided that P  AVC. If P < AVC, the firm should shut down its plan to minimize its losses. Demonstration Problem2. Suppose the cost function for a firm is given by C(Q) = Q 2. If the firm sells output in a PC market and other firm in the industry sell output at a price of $10, what level of output should the firm produce to maximize profits or minimize losses? What will be the level of profit or losses if the firm makes the optimal decision?

Monopoly refers a situation where a singgle firm serves an entire market for a good for which there are no close substitutes. P P0P0 P1P1 0 Q 0 Q 1 A B D f = D M The monopolist is restricted by consumers to choose only those price-quantity combinations along the market demand curve. The monopoly can choose price or quantity.

Sources of Monopoly Power : 1. Economies of Scale : Avarage total costs decline as output increases. Diseconomies of Scale : Avarage total costs increases as output decline ATC $ PMPM ATC(Q M) ATC(Q M /2) Q M /2 Q M Q * Q Avarege cost when two firms share the market Avarage Cost with a Singgle Firm. Demand 2. Economies of Scope : C(Q 1,0) + C(0,Q 2 ) > C(Q 1,Q 2 ) 3. Cost Complementarity :  MC 1 (Q 1,Q 2 )  Q 2 4. Patent and Other Legal Bariers.

Maximizing Profits The manager goal is to characterize the price and output decisions that maximize the monoplolist’s profits. Elastic Unitary Inelastic D P POPO 0 Q0Q0 MR $ 0 elastic inelastic Unitary Max. revenues = P 0 x Q 0 R(Q) (Total Revenue) Q

Formula Marginal Revenue of Monoplolist : MR = The Output Decision : The profit of a monopolist with a cost function of C(Q) are :  = R(Q) - C(Q) A`Profit-maximizing monopolist should produce the output Q M, such the marginal revenue equals marginal cost at an output of Q M Demontration Problem 3 : Show that if demand is elastic (E = -2), marginal revenue is positive but less than price. Show if demand is unitary elastic (E = -1), marginal revenue is zero. Finally show that if demand is inelastic (E = -0.5), marginal revenue is negative.

$ 0 QMQM A B Maximum Profits 0 QMQM  = R - C Q Slope of R =MR Slope of C(Q) = MC Profits (  ) C(Q) (Cost function) R = P(Q) x Q Revenue function

Profit QMQM MR D MC ATC ATC (Q M ) PMPM $

Demonstration Problem 4. Suppose the inverse demand function for a monopolist’s product is given by P = 100 – 2 Q and the cost function is given by C(Q) = Q Determine the profit-maximizing price and quantity and the maximum profits.

Monopolistic Competition This market structure exhibits some characteristic present in both P C and monopoly. Conditions for Monopolistic Competition : An industry is monopolistically competetive if : 1.There are many buyers and sellers. 2.Each firm in the industry produces a differentiated product. 3.There is free entry into and exit from the industry. The market for humburgers is a prime example. Many fast-food restaurant produce humburgers, but the humburgers produced by one firm differ from those produced by others firm. Profit Maximization To maximize profits, the monopolistically competetive firm produces where MR = MC

Problem : You are the manager of a monopolistically competetive firm. The inverse demand for your product is given by P = 100 – 10Q, and your marginal cost is MC = 5 + Q. a.What is the profit maximising level of output? b.What is the profit-maximising price? c.What are the maximum profit?

$ P* ATC(Q*) Q* MR D MC ATC Profit 0 Profits = (P* - ATC(Q)) x Q*

Oligopoly - Oligopoly refers to situation where there are relatively few large firm in an industry (two – ten). - The products the firms offer may be either identical and differentiated. The optimal decision of whether to raise or lower price will depend on how the manager believes others manager will respond. D1D1 D2D2 0 Q 0 Q B Po A C $ Demand if revals match price change Demand if revals do not match price change.