Price and

Output
Determinati
on in
Various
Market
Structure
Areta, Quennie BSACT3
Coria, Queena
Deximo, Layrose
Matalog, Nikki
Ramos, Joyce

A firms decisions concerning price and production will

vary depending on the character of the industry in
which it is operating. At one extreme we find single
producer dominating a market; at the other thousands
of firms, each supplying a minute fraction of market
output. Between these extremes lies an unlimited
variety of market structures.

Introduction

Pure
Competition

where there are many

firms to a market
situation that
produces similar
goods (homogenous
products)
Firms can freely enter
or exit the market
Firms are price takers.

In a perfect competition market cannot affect

the market price of its product.

If Firm Increases price they would loose

customers.

Can sell any amount of goods as long as the

firm has its capacities.

Output Decision

Firm- produces homogenous products so that there will

be competition in units of goods.

Price and quantity are determined by the intersection

of demand and supply

Total output = Total demand is EQUILIBRIUM

Equilibrium of the industry

It is important for an industry to know what

drives demand and supply and also to know
what determines prices and revenues.

Demand shifters: prices, income, advertising,

prices of other products.

Supply shifters: input cost, technology, research

and development.

Price and output in a perfectly competitive

market

Profit maximization = TOTAL REVENUE TOTAL COST

Total revenue = P x Q

Total revenue is proportional to the amount of output.

Average Revenue- tells how much revenue a firm

receives for the typical unit sold.

Average Revenue= TOTAL REVENUE/QUANTITY SOLD

Revenue of a competitive firm

Profit maximizing by comparing

MR and MC

Marginal cost = changes in total

cost/changes in quantity

Marginal revenue = changes in total

revenue/ changes in quantity

Change in profit= MR-MC

The firm is in equilibrium

when it maximizes its profit.

Equilibrium outputoutput that gives maximum

profit to the firm.

Horizontal P-lineFirms perfectly competitive

and act as demand curve
for the firm.

Horizontal because the firm s

price taker

Equilibrium of the firm

In a perfectly competitive market a firms

Price=Average Revenue= Marginal Revenue

1. profits are maximum only at the point where

Marginal Revenue= Marginal cost exactly equal
(MR=MC).

2. MC should have positive slope.

3. MC > MR the firm should decrease its output

MC < MR firms should increase its output

Supply curve Profit maximization

MR= AR

MC curve is cutting MR curve at two places

T and R.

P= MR = MC = AC

Firm produces at minimum of average

costs

Equilibrium of the firm

MC curve is upward sloping.

ATC is u-shaped

Marginal-cost curve crosses the average total cost

curve at the minimum of average total cost.

Since firm is a price taker its MR=P.

Marginal cost curve and the firms supply

decision

Various quantities
the firm will
supply at each
price.

MC Depicts the
firms supply
curve.

P rises production
also rises

Supply curve of the firm in a competitive

market

MR= MC at E

Equilibrium
output= OQ

Since AR=
ATC or OP=
EQ, the firm is
just earning a
normal profit.

Short run Equilibrium of a competitive form:

Normal profits

In the short run a firm will attain equilibrium position

at the same time it may earn supernatural profits,
normal profits or losses depending upon its cost
condition.

Supernatural Profits- Average Revenue > Average total

cost

Normal profits- when the firm meets its total average

cost. Average Revenue= Average total cost (AR=ATC)

Short run Equilibrium: supernatural profits

 At E, MR= MC
MR= Horizontal line
MC= U-shaped that
cut
MR curve at E.
OQ is the equilibrium
output for the firm.
Profit per unit EB (ARATC)
AR is EQ
ATC is BQ
Supernatural
profits
in
short
run
Total profits= ABEP

Shutdown- short run decision to not produce anything

during specific period of time because of current
market conditions.

Exit long run decision to leave the market.

Firm that shuts down temporarily still has to pay its

fixed costs. Thus exits the market doesnt have to pay
any cost at all.

Short run decision to shut down

Shutdown If the total revenue that it would get is < to its

variable costs of production (TR < VC)

Shutdown by dividing TR/Q <VC/Q

Shutdown If the price of the good is less that the average

variable cost of production.

If the firm produces anything, it produces the quantity at

which MC=P (price of a good)

Simplify P<ATC

If the price < AVC better to shutdown.

Shutdown

Exit If the total revenue that it would get is < its total
cost. (TR<TC)

By dividing TR/Q<TC/Q

Exit if P<ATC

The firm chooses to exit if the price of its good (P) is

less than the average total cost of production.

Firms long run to exit or enter a market

If P > ATC= Profit is positive

If P < ATC= Profit is negative.

The process of entry and exits end only when price and
average total cost are driven to equality

Monopoly
A firm that is the sole
seller of a product
without close
substitutes

 Single
No

Seller

Close Substitutes

Price

Maker

Blocked

Entry

Advertising

Characteristics of Monopoly

Monopoly Resources
a key resource required for production is owned by a single

Government- Created Monopolies

the government gives a single firm the exclusive right to

produce some good or service

The Production Process

a single firm can produce output at a lower cost than can a

larger number of producers

Barriers to entry (Three Sources)

firm

Monopoly VS Competition

Monopolys Revenue

Profit Maximization

Monopolys Profit

How Monopolies Make Production and Pricing

Decisions

Monopoly VS Competition

Monopolys Revenue

For a competitive
firm : P = MR = MC
For a monopoly firm: P
> MR = MC

Profit Maximization

Profit = TR TC
Profit = (TR/Q
TC/Q) x Q
Profit = (P ATC ) x
Q

Monopolys Profit

Consumers the high price makes monopoly

undesirable

Owners the high price makes monopoly very

desirable

The Welfare Cost Of Monopolies

The Deadweight Loss

The business practice of selling the same good

at different prices to different customers

Not possible in competitive market

Price Discrimination

Increasing competition with antitrust laws

Regulation

Public Ownership

Doing Nothing

Public Policy Toward Monopolies

Monopolistic
Competition

The model of monopolistic

competition describes a
common market structure
in which firms have many
competitors, but each one
sells a slightly different
product.

Was identified in the 1930s

by Edward Chamberlin and
Joan Robinson.

1.Many

sellers

2.Product
3.Free

differentiation

Entry

Characteristics of Monopolistic Competition

Physical Product Differentiation

Marketing Differentiation

Human Capital Differentiation

Differentiation through Distribution

Four Main Types of Differentiation

There are no significant barriers to entry;

therefore markets are relativelycontestable.

Differentiatiion creates diversity, choice and

utility.

The market is more efficient than monopoly but

less efficient than perfect competition.

Advantages of Monopolistic Competition

Some differentiation does not create utility but

generates unnecessary wates.

Assuming profit maximization, there is

allocative inefficiency in both the long and
short-run.

Disadvantages of Monopolistic Competition

P < ATC -LOSS

P > ATC - PROFIT
P = ATC - BREAKEVEN

Oligopoly

a market structure in
which there is a few
dominant firms
are large enough to
influence the market
price
products can be
homogenous or
differentiated

Cartel a group of firms that gets together and

makes price and output decisions jointly

Tacit collusion occurs when firms end up fixing

prices without a specific agreement or when
such agreements are implicit

The Collision Model

Price leadership a form in which one dominant

firm sets prices and all smaller forms in the
industry follow its pricing policy

Results might be similar but not identical to

collusion model

The Price Leadership Model

Introduced by the mathematician Antoine

Augustin Cournot

Focused on oligopoly with only two firms

producing identical products and not colluding

Duopoly a two firm oligopoly

The Cournot Model

Analyzes the choices made by rival firms,

people and even governments when they are
trying to maximize their own well-being while
anticipating and reacting to the actions of
others in their environment

Game Theory

Dominant strategy a strategy that is best no

matter what the opposition does

Prisoners dilemma a game in which the

players are prevented from cooperating and in
which each has a dominant strategy that leaves
them both worse of than if they could cooperate

Game Theory

Nash equilibrium In game theory, the result of all

players playing their best strategy given what their
competitors are doing

Tit-for-tat strategy a repeated game strategy in

which a player responds in kind to an opponents play.

Game Theory

Summary

Philippines Rethinks Its Monopolies

Competition Act sets up antitrust panel as
consumers gripe about high bills

News Article related to the Topic

The End
That In All
Things,
GOD MAY
BE
GLORIFIED!
Areta, Quennie BSACT3
Coria, Queena
Deximo, Layrose
Matalog, Nikki
Ramos, Joyce