Perfect Competition Properties = “P=MR” /There Are Many Producers/ Supplier/ The Product is Homogeneous /There are many buyers / A Firm is a “ Price Taker” / All Producers have Complete Knowledge of the input prices at different places. /All Buyers have complete Knowledge of the Producers prices at different places./The Entry into & Exit out of the industry is easy.
Monopoly Properties: The Product is Heterogeneous /Only one Producer/There are many buyers /Entry into the Industry is Difficult /The Producers decide the Product Price
Monopolistic Properties: There are many Buyers & Producers /The Products are slightly Differentiated /The Products are good substitutes to each other /Entry into & Exit from Industry are easy /The Producers decides the prices of their products
Oligopoly Properties: There are Small Number of Firms in the Industry /The Product may be Homogenous or Heterogeneous/The Firm May decide it’s products price or a number of firms may come together and decided their (Homogenous) product’s price. Example “OPEC”/The Firms do not compete with each other on the price front since a price war would hurt all of them /They may compete on non price front like advertisements, services, etc.
Optimum Output Conditions:TP= TR-TC , So TP Slope = Derivative TP/ Derivative Q , if = 0 Profit is Maximum // 0 = MR-MC => MR=MC
1. MR=MC 2.MC must be Rising not falling 3.P=Minimum AC 4.Every Firm makes a Zero Economic Profit
(Slope “ MR is Horizontal” , Per Unit Profit = P –AC ,, Total Profit = (P-AC)Q,)
Profit Situation= P>AC - Loss Situation=P<>
Why is P=MR in Perfect Competition? Because your demand curve is horizontal. No matter how much you produce, it always sells at the same price. In other market structures, you can raise or lower price
Why is MR below the Demand Curve? marginal revenue is less than price. A. Because the monopolist must lower the price on all units in order to sell additional units, marginal revenue is less than price. B. Because marginal revenue is less than price, the marginal revenue curve will lie below the demand curve.
Shut Down Analysis: (Has 4 P’s = 4 MR’s (Horizontal) & 4 Q’s(Q1 from right) & 3 Curve upwards MC,AC,AVC)
Case 1: if AVC < p="">< ac="The" firm="" should="" continue="" production="" is="" spite="" of="" making="" loss="">
Case 2: P= Min AVC or Per Unit Loss = AFC The firms presence is felt in the market and Producer is indifferent about continuing on shutting down.
Case 3: P >
Types of Oligopoly:
1-Duopoly: There are only two producer.
2- Oligopoly: the products is Homogenous
3-Differentiated Oligopoly: The Firms Produce Differentiated Products
Models of Oligopoly:
Price Leadership Model:
There are few forms in the industry producing a homogenous product
A big Firm or a low cost firm beomces a dominant (leader) for the price fixing.
It Fixes it’s price when it’s output is the Optimum which maximizes it’s profit .
Other firms are the price takers
The Dominant firm allows other firms to sell before it at the price fixed by the dominant firm
It fill the remaining Gap in the market.
Two firms in the Industry , they decide product price //Industry output E Q= Q1+Q2 //Both Firms Make Profit //The more efficient the firm the higher its makes over the less efficient //Per unit price is shown by the difference between P & Their AC//The Cartel assures that all member firms make profit, // The loss making leave it because they make it weak, and they don’t bargain