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Price Discrimination Price discrimination exist when sales of identical goods or services are transacted at different prices from the same provider Example of price discrimination : Palestinian Studies Course at the Islamic University.
Ch 7 : Industrial Organization in Different Markets Perfect competition market
Major Markets forms Perfect Competitions : The market consists of a very large number of small firms producing product in the same domain. No one, whether a consumer or a producer can affect the price.
Major Markets forms Monopolistic Competitions : it is when there are large producers sell products that are differentiated from one another as goods but not perfect substitutes. The number of producers is lower than in the case of perfect competition market.
Major Markets forms Oligopoly : is a market form in which a market is dominated by a small number of sellers (oligopolists). The number of producers is lower than in the case of monopolistic competition market. The sellers can affect the price using different ways.
Oligopsony (Buyrs’ Oligopoly): is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers.
Monopoly: It is when there is only one provider of product or service. So the monopolistic firm can determine either price or quantities in the market , and is able to make higher profit than other types of markets like perfect competition market.
Natural Monopoly: A monopoly in which economies of scale causes efficiency to increase continuously with the size of the firm. This will happen in the case of the natural resources or new technology.
Monopsony: is a market form in which only one buyer faces many sellers. For example one firm buys raw materials from so many sellers.
Market Structure Sellers Buyers Entry numbers barriers Buyers numbers Perfect Competition No Many Monopolistic Competetion No Many Oligopoly Yes Few No Many Oligopsony No Many Yes Few Monopoly Yes One No Many Monopsony No Many Yes One
Perfect Competition market : 1. Atomicity : It means there are large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. ( Price taker ).
2. Goods are perfect substitutes: The goods are homogeneous without any differences. 3. Perfect Complete Information : All firms and consumers know the prices set by all firms. There is one price for the good in the market. Equal access : There are no barriers to get technology
4. Equal access : All firms have access to production technologies and resources ( including information ) are perfectly mobile. This means there are no barriers in the market
5. Free Entry and Exit: Any firm may enter or exit the market as it wishes at any time without any barriers. 6. Transaction and fees costs are zero This means that there is no transaction cost or fees for all operations in the perfect competition market.
7. The price is determined at the level that supply intersects demand curves. The firm is a price taker In general, none of the condition above will be applied in the real markets.
The Equilibrium in the short Run in the perfect competition market 1. The totals Approach ( TR, TC )
Economic Profits TR TC Slope = MR a b Slope = MC If MR = MC Profit maximization when MC increases If MR ˃ MC the firm should increase its production If MR ˂ MC the firm should decrease its production
The Equilibrium in the short Run in the perfect competition market 2. The Average Approach ( AR , AC )
Economic Profits MC ATC AVC P=MR ATC AVC Profit Max Output level = q* © 2001 Claudia Garcia-Szekely 19
Economic Profits ATC TR – TC = Profit MC P x Q = TR AVC P P=MR Profit ATC AVC ATC x Q = TC FC TR AVC x Q = VC TC VC AFC x Q = FC q* Profit Max Output level © 2001 Claudia Garcia-Szekely 20
Breaking Even MC TC = TR No loss or profit ATC AVC ATC = P P P = MR AVC TR TC VC q* Profit Max Output level © 2001 Claudia Garcia-Szekely 21
Economic Losses MC TC AVC ATC P AVC LOSS P = MR TC TR VC q* Profit Max Output level © 2001 Claudia Garcia-Szekely 22
Shut down Decisions in the Perfect Competition Market
If TR > TVC The firm should produce at a loss MC FC AVC ATC P AVC ATC LOSS FC P = MR TR VC q* Profit Max Output level © 2001 Claudia Garcia-Szekely 24
If TR < TVC Loss when producing q* is larger than the FC LOSS ATC MC TC FC AVC Loss > FC P VC TR q* Profit Max Output level © 2001 Claudia Garcia-Szekely P=MR Revenues are not enough to cover the variable cost 25
If price falls below AVC, producing at MC=MR will generate losses greater than fixed costs. • P Shut Down Shutdown point P = minimum AVC is called the firm’s shutdown point. • The firm minimizes its losses by producing zero units. © 2001 Claudia Garcia-Szekely 26
The Equilibrium in the Long Run in the perfect competition market
When firms enter attracted by profits Supply shifts right MC S 0 Zero Profit S 1 ATC P 0 P 1 MR 0 Profit Price drops Firms will produce at the lowest ATC MR 1 D q 1 Firms will enter until profits are zero q 0