1. Types of market structure:
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Discussions:
Characteristics of each market
Demand curve (AR) and MR
Profits-maximization rule
Short run and long run output decision

2. Perfectly competitive market
Characteristics:
Large number of buyers and sellers in the market. Firms are price takers because the individual sales volume is relatively small compared to market volume.
Each firm/ seller or each buyer acts independently, rather than coordinating decisions collectively
Each firm produces a homogeneous (an identical) product: buyers cannot distinguish the product of one seller from that of another.
Perfect information about prices
The prices of all sellers are known
A consumer will purchase at the lowest price available in the market
No sale can be made at any higher price.
Free entry into and exit from market: Equal access to resources
Absence of promotion strategy and transport cost.

3. Demand (AR) and MR curve
Total revenue (TR) = P x Q
Average revenue (AR) = TR / Q = P
Marginal revenue (MR) = ΔTR / ΔQ P Q
TR=P x Q
AR= TR/Q
MR= ΔTR/ ΔQ 10 1 2 3 20 30
P, AR, MR
P = AR = MR 10
Kuantiti (Q) 1 2 3

4. Demand at the market and firm level under perfect competition
Market (industry)
Firm P P D S
P = AR = MR
RM10
RM10 D S D
2000
Output 1 2
Output

5. Equilibrium of a Firm
A firm is in equilibrium when it earns maximum profit or when minimum losses occur.
Equilibrium output = output level which gives the maximum profit to a firm.
Profit maximization
Total revenue and total cost approach
Profit = TR – TC
Profit maximization: the highest vertical distance between TR and TC.
Marginal revenue and marginal cost approach
Profit maximization: MR = MC

7. Profit maximization under perfect competition
Short-run output decision: MR = MC
P > AC firm earns economic profits/abnormal profit
P = AC zero economic profits/ normal profit
P < AC firm suffers economic losses
P < AC but P ≥ AVC loss by operating, but this loss < FC
P < AVC shut down
Long-run output decision

8. Short-run output decision
P > AC
P = AC
Price & costs
Price & costs MC MC AC AC A P1
AR=MR=P=DD P P2 A B
AR=MR=P=DD Q
Output (Q) Q
Output (Q)
TR = 0QAP1
TC = 0QBP2
Profit = TR – TC = P1ABP2
TR = 0PAQ
TC = 0PAQ
Profit =TR –TC = 0

9. Firm incurs a loss P < AC but P > AVC P < AC – a loss
Harga & kos MC AC
Harga & kos MC AC A P2
AVC P1 A C1 B
AR=MR=P P B
AR=MR=P C2 E Q
output
TR = 0QBP1
TC = 0QAP2
TR < TC, firm incurs a loss = P1BAP2
This firm can reduce cost by using a better technology to obtain normal profit. AC shifts downwards.
output Q
TR = 0PBQ = 0C2EQ + C2EBP
TC = 0C1AQ = 0C2EQ + C2EAC1
The firm incurs a loss, but TR > VC or AR > AVC

10. MC and short-run supply curve for a competitive firm
AVC MC Po P1 P2 P3 Qo Q1 Q2 Q3 J K L M
MC curve at points JKLM = a firm’s SS curve
Output
Price

11. Long-run competitive equilibrium
Free entry into and exit from market: if profits were +ve, entry would occur and P would fall. If profits were –ve, exit would occur and P would rise. Ultimately P = AC, all firms in the market earn zero economic profits/ normal profit. P = MR= MC, P = minimum AC.
Harga & kos
LMC
LAC
SMC
SAC
AR=MR=P P
Output Q

12. Calculation approach:
1. The cost function for a firm is given by
C = 5 + Q2
If the firm sells output in a perfectly competitive market and other firms in the industry sell output at a price of RM20, what price should the manager of this firm put on the product? What level of output should be produced to maximize profits? How much profits will be earned?

13. Answer:
The manager should price the product at RM20
Profit-maximizing output: MC = P.
MC = 2Q = 20, Q = 10
Profits = TR – TC = PxQ – (5 + Q2)
= 10(20) – 5 – 100
= RM95

14. Suppose the cost function for a firm is given by C = 100 + Q2
Suppose the cost function for a firm is given by C = Q2. If the firm sells output in a perfectly competitive market and other firms in the industry sell output at a price of RM10, what level of output should the firm produce to maximize profits or minimize losses? What will be the level of profits or losses if the firm makes the optimal decision?

15. Answer:
P = RM10, MC = 2Q.
Profit maximizing output: P = MC, 10 = 2Q,
Q = 5 units.
Profit = TR – TC =10(5) – 100 – = 50 – 100 – 25 = -RM75
The firm incurs a loss of RM75, which is less than the loss of RM100 (fixed costs) that would result if the firm shut down its plant in the short run.

16. A vegetable seller faces a horizontal demand curve
A vegetable seller faces a horizontal demand curve. Total variable costs are given by TVC=150Q – 20Q2 + Q3. At what price should the firm shut down?
Solution:
Shut down point occurs when AVC is at the minimum point. It also happens when P=MR=MC=AVC. Derive TVC to obtain MC.
MC = dTVC/dQ = 150 – 40Q +3Q2
Divide TVC by Q to obtain AVC:
AVC = TVC/Q = 150 – 20Q + Q2
To find shut down price, set MC = AVC:
150 – 40Q + 3Q2 = 150 – 20Q + Q2
2Q2 – 20Q = 0, 2Q(Q - 10) = 0
Q = 0 or Q = 10
Substitute Q = 10 into the MC equation to obtain P
P = MC = 150 – 40(10) + 3(10)2 = 50
Shut down price is RM50.