Chapter 6 Market Structure Pure Competition Classification of

Chapter - 6 Market Structure Pure Competition

Classification of Market Structure Market is a place where buyers and sellers meet and exchange goods or services. There are certain conditions which create the structure of a market. It classified to: 1 - Pure (Perfect) Competition 2 - Monopolistic Competition 3 - Oligopoly 4 - Monopoly 2

Pure Competition A purely competitive industry has the following characteristics: 1 - Many sellers 2 - Low barriers to enter 3 - Competitors’ products are identical 4 - Buyers have perfect information 3

Pure Competition The objective of any firm is, produce the quantity of output that maximizes its economic profit. Profit = Total Revenue (TR) - Total Cost (TC) Example 1 A firm sells 100 products at $2. 00 each. Its total cost is $160. What is its profit? 4

Profit Maximization of a Purely Competitive Firm Example 1 answer Profit = TR – TC TR = P x Q = $2 x 100 = $200 Profit = $200 - $160 = $40 5

Profit Maximization of a Purely Competitive Firm Because one firm in pure competition is a small part of the entire market, it can supply more products to the market without significantly affecting the supply and the price. For example, if the market price is $2, then a purely competitive firm can sell 100 products at $2, 110 products at $2, or 120 products at $2. 6

Marginal and Average Revenue Marginal revenue is the additional revenue per product. For example, if at Q = 100, TR = $200, and at Q =110, TR = $220, then MR = ∆TR / ∆Q = $20 / 10 = $2. Average revenue is the revenue per product. If at Q = 100, TR = $200, then AR = TR / Q = $200 / 100 = $2. 7

Marginal and Average Revenue Demand revenue for a purely competitive firm, which sells a product at $2 is as follows: Q Price TR MR AR 0 $2 $0 - - 100 $2 $2 110 $2 $220 $2 $2 120 $2 $240 $2 $2 130 $2 $260 $2 $2 We conclude at pure competitive firm : P = MR = AR 8

Profit Maximization of a Purely Competitive Firm n A Purely Competitive Firm’s Total Revenue Curve Price, Revenue Total Revenue 240 220 200 110 120 Quantity 9

CH 6 - Profit Maximization of a Purely Competitive Firm n A Purely Competitive Firm’s Demand, Marginal, and Average Revenue Curves Demand, AR, MR, Price 2. 00 D = P = MR = AR 100 110 120 Quantity 10

Profit and Loss Economic Profit TR > TC ATR > ATC P > ATC No profit or loss Normal Profit ( Break-Even Point ) TR = TC ATR = ATC P = ATC Loss but it can continue in production TR < TC TR > TVC P < ATC P > AVC Loss. ( Shut-Down Point ) TR = TVC P = AVC Loss. Close the firm and stop production TR < TVC P <AVC 11

Achievement Economic Profit AR, MR, Price, Costs 2. 00 MC ATC EP AVC D = MR = AR = P Quantity EP : Equilibrium Point; point of profit maximization. MR = MC 12

Profit Maximization of a Purely Competitive Firm The Profit-maximizing Quantity AR, MR, Price, Costs MR=MC MC ATC 2. 00 AVC Pam D = MR = AR = P Quantity 13

Profit Maximization of a Purely Competitive Firm n The Profit Area AR, MR, Price, Costs MC MR=MC 2. 00 1. 80 ATC D = MR = AR AVC 100 Quantity 14

Purely Competitive Firm The Case of a Loss AR, MR, Price, Costs MC 1. 60 AVC Qlm ATC D = MR = AR = P Quantity 15

Purely Competitive Firm The Case of a Loss and a Shut-down AR, MR, Price, Costs MC ATC AVC 1. 20 D = MR = AR = P Quantity 16

The Long-run Equilibrium Price and Quantity AR, MR, Price, Costs MC ATC AVC 1. 75 D = MR = AR Qlr Quantity 17

Example 1: If the price of one unit is 10 S. R. , the equilibrium quantity = 100 units or (production) and the average cost at the equilibrium point = 8 S. R. - Calculate the firm’s profit? - Name the kind of it is profit? 18

Example 2 : If the price of one unit is 9 S. R. , the equilibrium quantity = 90 units or (production) and the average cost at the equilibrium point = 9 S. R. - Calculate the firm’s profit? - Name the kind of it is profit? 19

Example 3 : If the price of one unit is 8 S. R. , the equilibrium quantity = 80 units or (production) and the average cost at the equilibrium point = 9 S. R. - Calculate the firm’s profit? - Name the kind of it is profit? 20

Exercise : This table give some data of pure Competitive Firm X. Quantity - Q Price - P AVC ATC MC 0 18 0 - - 1 18 5 35 5 2 18 4. 5 19. 5 4 3 18 4 14 3 4 18 5 12. 5 8 5 18 6 12 10 6 18 8 13 18 7 18 10 14. 3 22 8 18 12 15. 8 26 9 18 15 18. 3 39 10 18 20 23 65

By using the previous table answer this questions: 1 -Dose firm X earn profit when its produce 6 units. 2 - How many units the firm X must produce to maximize its profit. 3 - Calculate the firm profit. 22