MBF GE Micro PPT Ch11
11
Pure Competition in the Short
Run
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Four Market Models
• Pure competition
• Pure monopoly
• Monopolistic competition
• Oligopoly
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
LO1
Four Market Models
Characteristics of the Four Basic Market Models
Pure
Characteristic Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of firms
A very large number Many
Few
One
Type of product
Standardized
Differentiated
Standardized or differentiated Unique; no close subs.
Control over price None
Some, but within rather narrow limits
Limited by mutual inter-dependence; considerable with collusion Considerable
Conditions of entry Very easy, no obstacles Relatively easy
Significant obstacles Blocked
Nonprice
Competition
None
Considerable emphasis on advertising, brand names, trademarks
Typically a great deal, particularly with product differentiation Mostly public relation advertising
Examples
Agriculture
Retail trade, dresses, shoes Steel, auto, farm implements Local utilities
LO1
Pure Competition: Characteristics
• Very large numbers of sellers
• Standardized product
• “Price takers”
• Easy entry and exit
• Perfectly elastic demand
• Firm produces as much or little as they want at the price
• Demand graphs as horizontal line
LO2
Average, Total, and Marginal
Revenue
• Average Revenue
• Revenue per unit
• AR = TR/Q = P
• Total Revenue
• TR = P X Q
• Marginal Revenue
• Extra revenue from 1 more unit
• MR = ΔTR/ΔQ
LO3
Average, Total, and Marginal
Revenue
Firm’s
Demand
Schedule
(Average
Revenue)
P
QD
Firm’s
Revenue
Data
TR
MR
0 $131
$0
] $131
1 131 131
] 131
2 131 262
] 131
3 131 393
] 131
4 131 524
] 131
5 131 655
] 131
6 131 786
] 131
7 131 917
] 131
8 131 1048
131
9 131 1179 ]
131
10 131 1310 ]
LO3
TR
D = MR = AR
Profit Maximization: TR–TC
Approach
• Three questions:
• Should
Pure Competition in the Short
Run
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Four Market Models
• Pure competition
• Pure monopoly
• Monopolistic competition
• Oligopoly
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
LO1
Four Market Models
Characteristics of the Four Basic Market Models
Pure
Characteristic Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of firms
A very large number Many
Few
One
Type of product
Standardized
Differentiated
Standardized or differentiated Unique; no close subs.
Control over price None
Some, but within rather narrow limits
Limited by mutual inter-dependence; considerable with collusion Considerable
Conditions of entry Very easy, no obstacles Relatively easy
Significant obstacles Blocked
Nonprice
Competition
None
Considerable emphasis on advertising, brand names, trademarks
Typically a great deal, particularly with product differentiation Mostly public relation advertising
Examples
Agriculture
Retail trade, dresses, shoes Steel, auto, farm implements Local utilities
LO1
Pure Competition: Characteristics
• Very large numbers of sellers
• Standardized product
• “Price takers”
• Easy entry and exit
• Perfectly elastic demand
• Firm produces as much or little as they want at the price
• Demand graphs as horizontal line
LO2
Average, Total, and Marginal
Revenue
• Average Revenue
• Revenue per unit
• AR = TR/Q = P
• Total Revenue
• TR = P X Q
• Marginal Revenue
• Extra revenue from 1 more unit
• MR = ΔTR/ΔQ
LO3
Average, Total, and Marginal
Revenue
Firm’s
Demand
Schedule
(Average
Revenue)
P
QD
Firm’s
Revenue
Data
TR
MR
0 $131
$0
] $131
1 131 131
] 131
2 131 262
] 131
3 131 393
] 131
4 131 524
] 131
5 131 655
] 131
6 131 786
] 131
7 131 917
] 131
8 131 1048
131
9 131 1179 ]
131
10 131 1310 ]
LO3
TR
D = MR = AR
Profit Maximization: TR–TC
Approach
• Three questions:
• Should