Scribd
Upload
445 views

Chapter-9 Imperfect Competition

Uploaded by

gr8_amara
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
445 views

Chapter-9 Imperfect Competition

Uploaded by

gr8_amara
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 23

Imperfect competition

and monopoly
Chapter 9
Patterns of imperfect competition

The major kinds of imperfect competition are;


1. monopoly,
2. oligopoly and
3. monopolistic competition.
Definition of Imperfect competition

If a firm can appreciably affect the market price of its


output, the firm is classified as an ‘imperfect competitor’

“Imperfect competition prevails in an industry whenever


sellers have some measure of control over the price of
their output”

Imperfect competition does not imply that a firm has an


absolute control over the price of its products
• For a perfect competitor, demand is perfectly elastic;
• For an imperfect competitor; demand has a finite elasticity
SOURCES OF MARKET IMPERFECTIONS

There are two principles of imperfect competition;

1. Industries tend to have fewer sellers when there are


significant economies of large-scale production and
decreasing costs.

2. Markets tend towards imperfect competition when there


are ‘barriers to entry’ that makes it difficult for new
competitors to enter an industry
Cost and market imperfection

If there are economies of scale, a firm can decrease its


average costs by expanding its output, at least up to a
point. This means bigger firms have an advantage over
smaller firms.

When economies of scale prevails, one or a few firms


will expand their outputs to the point where they
produce most of the industries total output. The industry
then becomes imperfectly competitive.
Barriers to entry
Barriers to entry are factors that make it hard for new
firms to enter an industry. When barriers are high, an
industry may have few firms and limited pressure to
compete. Economies of scale act as one common type of
barrier to entry.
 Government sometimes legally restricts competition in
certain industries. Important legal restriction includes
patents, entry restrictions and foreign-trade tariffs and
quotas.
A patent is granted to an investor to allow temporary
exclusive use of the product or process that is patented.

 Government also imposes entry restriction on many


industries. Typically utilities such as telephone,
electricity distribution or water. Etc.
 Government imposes import restrictions to have the
effect of keeping out foreign competitors.
High cost of entry:
There are economic barriers to entry as well. In some
industries the price of entry simply may be very high.
For instance commercial aircraft industry has an
economic barrier to entry.

Advertising and product differentiation:


Companies create barriers to entry for potential rivals
by using advertising and product differentiating

Product differentiation can impose a barrier to entry and


increase the market power of producers.
THE CONCEPT OF MARGINAL REVENUE
Price, quantity and total revenue
O/P for Max TR
TR = p x Q where
P = a – bQ Hence
TR = (a – bQ) * Q
or TR = aQ – bQ2
& MR = Slope of TR
or MR = a – 2bQ
We know that
TR is Max at O/P when
MR = 0
Hence O/P for Max TR
a – 2bQ = 0 or
Q = a/2b
Marginal revenue (MR) is the change in revenue that
is generated by an additional unit of sales. MR can
either be positive or negative.

Negative MR means that in order to sell additional unit,


the firm must decrease its price on earlier units so much
that its total revenue declines

Elasticity and marginal revenue:


Marginal revenue is positive when demand is elastic,
zero when demand is unit-elastic and negative when
demand is inelastic.
Profit maximizing conditions

Maximizing profit will occur when output is at that level


where the firm’s marginal revenue is equal to it marginal
cost.

The maximum profit price (P*) and quantity (q*) of a


monopolist come where the firm’s marginal revenue equals
its marginal cost
MR = MC, at maximum profit P* and q*
Monopoly equilibrium in graphs

O/P for Max T.Profit


Total Profit (TP)= TR-TC
TP = aQ – bQ2 – FC - VC
TP = aQ – bQ2 – FC - vQ TP
= – bQ2+aQ – vQ - FC
TP = – bQ2+(a – v)Q - FC
& MP = Slope of TP
or MP = - 2bQ + a – v
We know that
TP is Max at O/P when
MP = 0
Hence O/P for Max T.Profit
- 2bQ + a – v = 0 or
Q* = a – v / 2b
Example-1
 Let Demand Function be p = 100 – 2Q per Month
 (Where a = 100 and b = 2)
 Let FC = Rs. 10,000 per month & VC = Rs. 40 / unit

 The O/P for Max TR = a / 2b or 100 / 2 (2)


 OR
 TR will be maximized when firm produces 25 units per month.

 Similarly O/P for Max T.Profit = a – v / 2b


or= 100 - 40 / 2 (2) OR
 TP will be maximized when firm produces 15 units per month.
Example-2
 Suppose that ABC Corporation has a
production (and sales)capacity of Rs.
1,000,000 per month. Its FC = Rs.
350,000 per month and variable costs are
Rs. 0.50 per rupee of sales.
 A) Calculate Annual B.E. Point,volume.
Develop graph too.
 B) What would be the effect on B.E.Point if
VC decreases by 25% and FC increases by
10%.
The profit maximizing point comes at that output where
MC = MR

A monopolist will maximize its profits by setting output


at the level where MC = MR because the monopolist has
a downward-sloping demand curve, this means that
P>MR. Because price is above marginal cost for a profit
maximizing monopolist, the monopolist reduces output
below the level that would be found in a perfectly
competitive industry and charges a higher price.
Dead Weight Loss
Monopoly and Perfect Competitive Firm Compared

P
Perfect.Compt.
a CS = aEPpc
PS = bEPpc
d Total Sur=aEb
Pm Supply

DWL E Monopoly
Ppc CS = adPm
PS = bcdPm
c Demand Total Sur=abcd
b DWL=dcE
Q
0 g
f
Perfect competition as a polar case of imperfect competition
MR for a perfect competitor: For a perfect competitor the sale of
extra unit will never depress price, and the “lost revenue on all
previous q” is therefore equal to zero. Price and marginal revenue are
identical for perfect competitors.
Under perfect competition P = AR = MR.

MR = P = MC for a perfect competitor: Profit maximization for


monopolist applies equally well to perfect competitor, but the result
is a little different. Economic logic says that profit is maximized at
the output level where MC equals MR.

But for a perfect competitor; MR = P,


Therefore MR = MC profit maximization condition becomes the
special case of P = MC
Because a perfect competitor can sell all it wants at the market
price, MR = P = MC at the maximum profit level of output.

You might also like