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Microeconomics Lecture 7 Supply of a competitive firm

Microeconomics Lecture 7 Supply of a competitive firm. Institute o f Economic Theories - University o f Miskolc. Mónika Kis-Orloczki Assistant lecturer. Competitive market/pure competition.

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Microeconomics Lecture 7 Supply of a competitive firm

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  1. MicroeconomicsLecture 7Supply of a competitivefirm Institute of Economic Theories - University of Miskolc Mónika Kis-Orloczki Assistant lecturer

  2. Competitive market/pure competition • Definition: A market whereeacheconomicagenttakesthemarketpriceasoutside of hisorhercontrol. • Caracteristics of thepurecompetition: • Largenumber of independantconsumers and suppliersonthe market non of themaredominant • Homogeneousproducts: allfirmsproduceproductssatisfyingthesameneeds • Free entry and exit (no legalorfinancialobstacles) • The economicagentsonthe market are „price-takers”, marketprice is determinedbythedemand and supplyonthe market

  3. Price at pure competition • Price is a given factor for the company in pure competition • Price is determined by the actors of the market, but one supplier itself can not change the priceprice-taker Requirements • No influence on the price, market price is only determined by market demand and supply • Racional economic agents • Well-informed economic agents Aim of thecompetitivefirm • To maximize the difference between the revenue and the costsprofit-maximization: πmax

  4. Calculation of profit • Profit: π=TR-TC • Total revenue (TR= P*Q): The amount received from thesale of theproduct Incase of purecompetition, thecompanysellsat a fixed price, so TR is linear • Total Cost(TC): Fixed costs plus variable costs • Marginalrevenue: ( ) the extra revenueonegetsfromincreasingthequantitysoldbyone unit • MarginalCost: () the increase in total cost that results from producing one more unit of output • Marginal Profit: (Mπ=MR-MC)

  5. Total and marginal revenue TR P MR

  6. MR AVC=VC/q AC=TC/Q

  7. Profit-maximisation • A firm, that is maximising his profit increases the production until his growing MC reaches the market price (on the last piece there is no profit at all) (MC=P)  • Continues the growing production until the product that is not causes loss yet. • In pure competition MR equals with market price (MR=P)

  8. π is maximal if Mπ=0 πmax  MR=MC=P

  9. Positive Economic Profit P MC P1> ACmin P1 AC ACq1 AVC Q q1 P1 * q1= TR ACq1* q1= TC=FC+VC (P1 -ACq1)* q1=Economic profit

  10. Recovery point (F) P MC Recovery point (F) P=ACmin MC=AC AC P2 MR AVC Q q2 Recovery point is at P=ACmin , both costs are recovered but Economic profit=0, the firm realizes normal profit P2 * q2= TC

  11. Minimizing the loss P MC AC AVCmin < P3 < ACmin ACq3 Loss AVC P3 AVCq3 Q q3 ACq3* q3= TC=FC+VC (ACq3- P3)* q3=Loss (ACq3- AVCq3)* q3=FC AVCq3*q3 =VC

  12. Shutdown point (Ü) P MC P4 = AVCmin AC ACq4 ACq4* q4= TC P4 * q4= VC (ACq4- P4)* q4=Loss Loss AVC P4 Q q4 • At shutdown point MC=AVC • The firm can decide to produce or not to produce • At a price under P4 is not worth procucing, because not even the variable costs are recovered

  13. Individualsupply of thecompetitivefirm P MC AC AVC Q The individual short-run supply curve of a competitive firm can be found in the increasing part of its Marginal Cost (MC)function above the intersection point with the AVC curve, above the shutdown point.

  14. The short-run industry supply • The industry supply= market supply • It is the horizontal sum of the individual supplies of the competitive firms at the different prices. • The more actors are on the market, the flatter the market supply is.

  15. The short-run industry supply

  16. Long-run supply • Long-run supply is the function of the market price and the number of producers present on the market • P= LAC=LMC • The competitive firms in long-run does not realize economic profit, only normal profit • „Little-shop example” • In long-run the competitive company can not finance the loss, so does who are realizing losses has to exit the market

  17. MicroeconomicsLecture 9The monopoly Institute of Economic Theories - University of Miskolc Mónika Kis-Orloczki Assistant lecturer

  18. Definitions • Monopoly:A market structureinwhichtheproduct is suppliedby a singlefirm.There is onlyonesupplier, producer inthe market. (S) • Monopolisticcompetition: A market structureinwhichtherearemanysellerswhoaresupplyinggoodsthatareclosebutnotperfectsubstitutes of eachother. Insuch a market eachfirmcanexercisesomeeffectonitsproduct’sprice. • Monopsony: A market inwhichthere is a singlebuyer. (D) • Oligopoly: A situation of imperfectcompetitioninwhich an industry is dominatedby a smallnnumber of suppliers.

  19. In a monopolistic market there is no substitute of theproduct, no otherproductscansatisfytheneedsinthesameway The monopolisticcompany is ‘price-maker’ Demand and Supplyonthe market • Demand:inverse ratio betweenthe P and D; D dependsonprice, income, needs… butnotonthe market position of thefirm • Supply:direct ratio of P and S, butifSincreases, the P decreases; inpurecompetitionsupply of 1 firmdoesnoteffectthe market priceasit is price-taker, butthemonopolycaninfluencetheprice

  20. Caracteristics of competitive market and monopoly • Market: • Competitive market: lots of buyers and lots of sellersmeet • Monopoly: demand of manybuyersmeetwiththesupplyofonesinglecompany • Choice of buyers: • Competitive market: thebuyercanchoosefromwhomtobuy • Monopoly: no choiceasthere is onlyoneseller • TR • Competitive market: dependson Q onlyas P is determinedbythe market • Monopoly: dependson Q and on P aswell

  21. Total Revenue Competitive market Monopoly TRmax MR D MR

  22. Competitive market: lots of actors in the market, firms know neither the market demand curve nor the total supply • Monopoly:one seller meets all the market demand, so the monopolist company knows the market demand and can adjust its supply to the demand. • Monopoly wants to achieve maximum revenue

  23. Profitmaximization of the monopoly

  24. Recoverypoint D and AC has only one common point, it is where MC=MR

  25. Minimizing loss

  26. The recovery and shutdown point of monopolies can’t be connected to one remarkable point or output. • Recovery point AC=P MC=MR • Shutdown point AVC=P MC=MR • There is an endless number of situations where the firm is operating in its recovery point and its profit is maximal. • Long run: the profit of the monopoly can’t be negative.

  27. Comparison of competitive market and monopoly

  28. Conclusions • SM < SC and PM > PC • The loss caused by the lower output and higher price of the monopoly is called: welfare loss, efficiency loss or deadweight loss

  29. Deadweightloss of themonopoly P A SC =∑MC B PM E C PC F G MR D QM QC Q

  30. Consumers’ssurplus (CS) • CSC= A; E; PCtriangle • CSM= A; B; PMtriangle (red) • Difference is PM ; PC ; B; E trapezium (green and blue) • The monopolytransformsone part of thedifferenceintoProducers’ surplus (green), theother part is calledthedeadweightloss (BCE triangle) • Deadweightloss: thelossforthesocietycausedbythelowerproduction and higherprice of themonopoly. Thisquantity is notevenproducedbythemonopolysoitis an efficiencyloss.

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