Ch7: Analysis of perfectly

competitive markets
• Ch7 : Analysis of perfectly competitive
markets
• All producers in all markets aim at maximizing
their profits.
• there are two extremes in the types of
markets: the perfectly competitive market
which is the most efficient market
• And the other extreme is monopoly which is
the least efficient market.
• Ch7 : Analysis of perfectly competitive
markets
• All producers in all markets aim at maximizing
their profits.
• there are two extremes in the types of
markets: the perfectly competitive market
which is the most efficient market
• And the other extreme is monopoly which is
the least efficient market.
• Perfectly competitive markets
• They are idealized markets that rarely exist in
reality, In this market there are large number
of producers and consumers that each one
has a very small share in the market so no one
of them can affect the price.
• 1- Each producer is a price taker. The producer
takes the price as given so the firms demand
curve is a horizontal line.
• Perfectly competitive markets
• They are idealized markets that rarely exist in
reality, In this market there are large number
of producers and consumers that each one
has a very small share in the market so no one
of them can affect the price.
• 1- Each producer is a price taker. The producer
takes the price as given so the firms demand
curve is a horizontal line.
• 2- the firms in this market produce
homogeneous = identical products (That
means all units are the same) such as
agricultural products wheat, corn and rice.
Since the products are identical producers
don't use advertising techniques and They
all charge the same price. So the price is
constant and takes a horizontal line.
• 2- the firms in this market produce
homogeneous = identical products (That
means all units are the same) such as
agricultural products wheat, corn and rice.
Since the products are identical producers
don't use advertising techniques and They
all charge the same price. So the price is
constant and takes a horizontal line.
• This horizontal line presents many variables:
1- It is the demand curve of the firm, the
producer will sell any quantity produced at the
same price.
2-It is the average revenue curve because
AR=TR/Q = PxQ/Q = P and we know that the
price is constant.
3- It is also the marginal revenue curve. MR is
the revenue of the last unit sold in the market
which is equal to the price and the price is
constant. So MR=P
• This horizontal line presents many variables:
1- It is the demand curve of the firm, the
producer will sell any quantity produced at the
same price.
2-It is the average revenue curve because
AR=TR/Q = PxQ/Q = P and we know that the
price is constant.
3- It is also the marginal revenue curve. MR is
the revenue of the last unit sold in the market
which is equal to the price and the price is
constant. So MR=P
• Producer Equilibrium in the perfectly competitive
markets
• The producer aims at maximizing his profit. We say that
the producer is at his equilibrium when he achieves his
max profit.
• Max profit = TR-TC
• 1st order condition (by differentiating then equating
the result with zero)
• MR-MC= 0
• MR=MC ( this is the equilibrium condition
in any type of markets)
• But in the perfectly competitive markets P=MC
• So the maximum profit comes at the output where
MC=P or MC=MR
• Producer Equilibrium in the perfectly competitive
markets
• The producer aims at maximizing his profit. We say that
the producer is at his equilibrium when he achieves his
max profit.
• Max profit = TR-TC
• 1st order condition (by differentiating then equating
the result with zero)
• MR-MC= 0
• MR=MC ( this is the equilibrium condition
in any type of markets)
• But in the perfectly competitive markets P=MC
• So the maximum profit comes at the output where
MC=P or MC=MR
• If the price = d1, we want to determine the
level of production that the producer should
produce in order to achieve his equilibrium (
that means the level of production that
achieves the max. profit.)
• If the price = d1, we want to determine the
level of production that the producer should
produce in order to achieve his equilibrium (
that means the level of production that
achieves the max. profit.)
• In the graph , A is the equilibrium point where
MR=MC, So the producer should produce Q1
• To calculate the profits , we compare between
AC and AR
• AC=BQ1 while AR=AQ1
• So AB is the profit per one unit
• In the graph , A is the equilibrium point where
MR=MC, So the producer should produce Q1
• To calculate the profits , we compare between
AC and AR
• AC=BQ1 while AR=AQ1
• So AB is the profit per one unit
• Assume that the price in the market decreases
to be d2 (tangent to AC), and we want to
determine the level of production that the
producer should produce in order to achieve
his equilibrium
•
• Assume that the price in the market decreases
to be d2 (tangent to AC), and we want to
determine the level of production that the
producer should produce in order to achieve
his equilibrium
•
• In the graph ,A is the equilibrium point where
MR=MC, So the producer should produce Q
• To calculate the profits , we compare between
AC and AR
• AC=AQ while AR=AQ , So AC=AR
The producer achieves zero profits.
• In the graph ,A is the equilibrium point where
MR=MC, So the producer should produce Q
• To calculate the profits , we compare between
AC and AR
• AC=AQ while AR=AQ , So AC=AR
The producer achieves zero profits.
• Assume that the price in the market decreases
to be d3 (below the AC), and we want to
determine the level of production that the
producer should produce in order to achieve
his equilibrium
• Assume that the price in the market decreases
to be d3 (below the AC), and we want to
determine the level of production that the
producer should produce in order to achieve
his equilibrium
• In the graph ,E is the equilibrium point where
MR=MC, So the producer should produce Q*
• To calculate the profits or the losses , we
compare between AC and AR
• AC=AQ* while AR=EQ* , So AC>AR
• So the producer achieves loss.
• In the graph ,E is the equilibrium point where
MR=MC, So the producer should produce Q*
• To calculate the profits or the losses , we
compare between AC and AR
• AC=AQ* while AR=EQ* , So AC>AR
• So the producer achieves loss.
• Although the producer achieves losses but still
this is the best situation for him because the
level of production at the producer
equilibrium makes him achieve the minimum
losses.
• Although the producer achieves losses but still
this is the best situation for him because the
level of production at the producer
equilibrium makes him achieve the minimum
losses.
Ch 8: imperfect competition and
monopoly
• Perfectly competitive market is an idealized
market that is hard to find in reality.
• In reality in most markets of car , aluminum,
cola, computers, mobiles and aircrafts there
are firms that are large enough to affect the
market price by changing the quantity they
sell. This is what we call the imperfect
competition markets. The major kinds of
imperfect competition markets are monopoly,
oligopoly and monopolistic competition.
• Perfectly competitive market is an idealized
market that is hard to find in reality.
• In reality in most markets of car , aluminum,
cola, computers, mobiles and aircrafts there
are firms that are large enough to affect the
market price by changing the quantity they
sell. This is what we call the imperfect
competition markets. The major kinds of
imperfect competition markets are monopoly,
oligopoly and monopolistic competition.
• In the perfect competition market the firm
faces a horizontal demand curve. It means the
producer can sell whatever he wants at the
prevailing price. So the firm is price taker not
price maker
• In the perfect competition market the firm
faces a horizontal demand curve. It means the
producer can sell whatever he wants at the
prevailing price. So the firm is price taker not
price maker
• In the imperfect competition market the firm
faces a downward sloping demand curve(
negatively sloped demand curve).
• If the firm increases its sales, that will depress
the market price ( causes the price to
decrease).
• So the firm is a price maker not a price taker.
• In the imperfect competition market the firm
faces a downward sloping demand curve(
negatively sloped demand curve).
• If the firm increases its sales, that will depress
the market price ( causes the price to
decrease).
• So the firm is a price maker not a price taker.
• Economists classify imperfectly competitive markets
into three different market structures:
• 1-monopoly
• It is the extreme kind of imperfect competition (and
the worst one).
• There is one large firm producing the good and there is
no industry producing a close substitute, so he has a
very large control on the price.
• For example: a firm that produces a new drug and was
granted a patent that prevents any other firm from
producing this drug for a certain period of time.
• Or the firm that has a franchise to provide water for
households.
• Economists classify imperfectly competitive markets
into three different market structures:
• 1-monopoly
• It is the extreme kind of imperfect competition (and
the worst one).
• There is one large firm producing the good and there is
no industry producing a close substitute, so he has a
very large control on the price.
• For example: a firm that produces a new drug and was
granted a patent that prevents any other firm from
producing this drug for a certain period of time.
• Or the firm that has a franchise to provide water for
households.
• 2- Oligopoly
• It means there are few sellers (from 2 to 10
producers) and they are large firms.
• Each firm can affect the market price.
• Ex. In the airlines industry, the decision of a
single airline to lower the price can start a
price war.
• Ex. Telecommunications firms in Egypt:
Vodafone , orange and etisalat, We
• 2- Oligopoly
• It means there are few sellers (from 2 to 10
producers) and they are large firms.
• Each firm can affect the market price.
• Ex. In the airlines industry, the decision of a
single airline to lower the price can start a
price war.
• Ex. Telecommunications firms in Egypt:
Vodafone , orange and etisalat, We
• 3- Monopolistic competition
• In this market there are large number of firms
producing differentiated products.(firms
produce automatic and manual washing soap:
Arial, Oxi, Tide, Persil, OmO and so on )
• The product sold by different firms are not
identical but differentiated.( the product of
each firm is different from the other in the
shape, colour, smell, taste…..)
• 3- Monopolistic competition
• In this market there are large number of firms
producing differentiated products.(firms
produce automatic and manual washing soap:
Arial, Oxi, Tide, Persil, OmO and so on )
• The product sold by different firms are not
identical but differentiated.( the product of
each firm is different from the other in the
shape, colour, smell, taste…..)
• Ex. Personal computers vary in speed memory,
hard disks quality and modems. Because
computers are differentiated, the firms can
sell them at slightly different prices.
• The firms in this market may use advertising
techniques to convince the consumers that
their goods are better than the others’.
• Ex. Personal computers vary in speed memory,
hard disks quality and modems. Because
computers are differentiated, the firms can
sell them at slightly different prices.
• The firms in this market may use advertising
techniques to convince the consumers that
their goods are better than the others’.
• Barriers to entry
• They are factors that make it hard for new firms
to enter an industry so it continues to be
imperfect competition markets.
• 1-Legal restrictions
• Such as patents. A patent is granted to an
inventor to allow exclusive use for his invention
for a certain period of time.
• Government also imposes entry restrictions
on providing utilities such as franchise for
telephones, electricity and fresh water. That
means the firm gets an exclusive right to provide
a service.
• Barriers to entry
• They are factors that make it hard for new firms
to enter an industry so it continues to be
imperfect competition markets.
• 1-Legal restrictions
• Such as patents. A patent is granted to an
inventor to allow exclusive use for his invention
for a certain period of time.
• Government also imposes entry restrictions
on providing utilities such as franchise for
telephones, electricity and fresh water. That
means the firm gets an exclusive right to provide
a service.
• 2- High cost of entry:
• It is an economic barrier. in the aircraft
industry the high cost of designing and testing
new planes discourage new firms from
entering the market.
• 3-Advertising and product differentiation:
• Advertising can create a well known name
and loyalty to well known brands that is not
easy to compete with.
• Ex. Pepsi and coca cola spend hundred
millions of dollars per year on advertising.
• 2- High cost of entry:
• It is an economic barrier. in the aircraft
industry the high cost of designing and testing
new planes discourage new firms from
entering the market.
• 3-Advertising and product differentiation:
• Advertising can create a well known name
and loyalty to well known brands that is not
easy to compete with.
• Ex. Pepsi and coca cola spend hundred
millions of dollars per year on advertising.
 Monopoly
• How the monopolist determine the quantity
produced and the price?
• The monopolist wants to maximize his profits.
• So he produces at the level of production
where MR=MC ( producer equilibrium rule)
 Monopoly
• How the monopolist determine the quantity
produced and the price?
• The monopolist wants to maximize his profits.
• So he produces at the level of production
where MR=MC ( producer equilibrium rule)
• So the equilibrium is at E, the monopolist
produces Q1 and sets the price at P1
• At Q1 the AC=CQ1, AR=RQ1
• The difference is the profit per one unit
• So RQ1-CQ1=RC=profit per one unit
• So the equilibrium is at E, the monopolist
produces Q1 and sets the price at P1
• At Q1 the AC=CQ1, AR=RQ1
• The difference is the profit per one unit
• So RQ1-CQ1=RC=profit per one unit
Questions: true or false:
• 1- In the perfectly competitive market, the
demand curve of the firm is negatively sloped.
• 2-In the perfectly competitive market the
producer is a price maker.
• 3-In the perfectly competitive market the
producer uses advertising techniques.
• 4- In the perfectly competitive market the
products are homogeneous.
• 5- When AR = AC the producer achieves his
equilibrium.
Questions: true or false:
• 1- In the perfectly competitive market, the
demand curve of the firm is negatively sloped.
• 2-In the perfectly competitive market the
producer is a price maker.
• 3-In the perfectly competitive market the
producer uses advertising techniques.
• 4- In the perfectly competitive market the
products are homogeneous.
• 5- When AR = AC the producer achieves his
equilibrium.
• Questions: true or false:
• 1- The monopolist produces a product that
has many substitutes.
• 2- Monopolistic competition market contains
few sellers with large size and they can set a
price war.
• 3-In the monopoly market, MR is always less
than AR
• 4- the monopolist maximizes his profit when
MR= MC
• Questions: true or false:
• 1- The monopolist produces a product that
has many substitutes.
• 2- Monopolistic competition market contains
few sellers with large size and they can set a
price war.
• 3-In the monopoly market, MR is always less
than AR
• 4- the monopolist maximizes his profit when
MR= MC