MARKET STRUCTURES Number of firms

PERFECT COMPETITION Too many

MONOPOLY One No close substitution e.g.: Water, electricity supply, cable TV.

MONOPOLISTIC Many small firms Many substitutes. e.g.: Toothpaste, shampoo, skincare products, soap, perfumes.

OLIGOPOLY Few large firms. Homogeneous/ standardized or differentiated. e.g.: Cement (homogeneous), cars/cigarettes (differentiated)

Types of Product Homogenous/standardized e.g.: Vegetable, chicken, Fruits, commodities.

Example of firm

Barriers to entry/exit Types of profit ShortRun

No barriers to enter/exit Supernormal/Economic Profit ( TR > TC) Subnormal/Economic Losses (TR < TC) Normal Profit/ Breakeven (TR = TC)

High level of barriers Supernormal/Economic Profit ( TR > TC) Subnormal/Economic Losses (TR < TC) Normal Profit/ Breakeven (TR = TC) Supernormal/Economic Profit ( TR > TC)

No barriers to enter/exit Supernormal/Economic Profit ( TR > TC) Subnormal/Economic Losses (TR < TC) Normal Profit/ Breakeven (TR = TC) Normal Profit/ Breakeven (TR = TC)

High level of barriers Supernormal/Economic Profit ( TR > TC) Subnormal/Economic Losses (TR < TC) Normal Profit/ Breakeven (TR = TC) Supernormal/Economic Profit ( TR > TC)

LongRun

Normal Profit/ Breakeven (TR = TC)

Price control Non-Price competition

Price taker

Price maker Depends on products: -Public utilities: none

Independent price-output policy Advertisement/promotion/free sample/pamphlet/fliers, etc.

Price Maker Depends on product: -Homogeneous goods: none -Differentiated goods: Advertisement/promotion/free sample/pamphlet/fliers, etc.

None

-Luxury goods:Advertisement/promoti on/free sample/pamphlet/fliers, etc.

Interdependence

Each firm independent

No competitor

Each firm independent

Mutual interdependence. (reason behind the kinked curve)

PROFIT MAXIMIZATION (LONG RUN)

Profit/loss = TR TC PERFECT COMPETITION = (P x Q) (ATC x Q) = =

MR=MC=D=AR

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

MR=MC

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

MR = MC

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

MR = MC Perfect Competition: MR = MC =AR to find profit maximization price and output (Q). Imperfect competition (Monopoly/monopolistic/oligopoly): MR = MC to find profit maximization output (Q) and drag along the output line until reach AR=DD curve to find profit maximization price. Always use the same level of quantity to find ATC Long run profit for each market structure depends on the barriers to entry. If there are no barriers to enter the market, other firms will easily enter the market and increase the total supply. Higher supply will force the price to drop and eventually firm will only get normal profit. No barrier = normal profitExistence of barrier = supernormal profit Initial equilibrium price and quantity determine by the market is RM 20 and 60 kg. Firm gains economic profit as the P > AC. The supernormal profit gain by firms attracts newcomers to enter the industry and cause the supply in the industry to increase from SS0 to SS1. Since with the higher SS, profit gain by the firm in this perfect competition will be zero and in the long run, firm will only gain normal profit. Price will drop to RM 15 (price-taker) and quantity remains at 60kg.

SHUT DOWN POINT: (P = min AVC) Theminimum operating-condition at which the firm will be better off if it shuts down than it will if it continues its operation. The shutdown is where a firm earns just enough revenue to cover its total variable costs with its current production. Firms operating at shut down point usually operating at a loss. Two important points to consider: i. If P <min AVC : Shut down ii. If P > min AVC : Continue operation

3. Calculate the amount of profit or loss at the equilibrium point and state the type of profit.

4. What is the value of AVC at the profit maximization level of output?

5. Looking at the current condition, what would be your advice to the firm?

1. Name the type of market structure the firm is operating? Justify your answer. 6. Now lets assume this firm shut down its operation, how much would it suffer? TC = TFC + TVC

2. Determine the profit maximization price and output. Is this firm operating in short run or long run?

Oct 06 - April 08