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Profit maximization → MR = MC
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Normal profit → AR = AC
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Supernormal profit → AR > AC
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Economic losses → AR < AC
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Revenue maximization → MR = 0
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Productive efficiency → MC = AC
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Allocative efficiency → MC = AR
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Perfect competition markets are those in which each firm has a small market share, They are powerless to determine price and they charge prices that are set by the market
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CHARACTERISTICS
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many buyers and sellers
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Freedom of entry and exit
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Perfect knowledge
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Homogeneous products
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Profit maximization
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Firms are price takers
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MAIN TERMS
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Marginal cost: cost added by producing 1 extra unit of a product
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Average cost: the average cost of each unit
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Average revenue: the revenue gained per unit sold
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Marginal revenue: increase in revenue from the sale of one extra unit
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short run
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long run
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Profit maximization: earn maximum profit with low costs
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normal profit: difference between total revenue and costs are equal to zero
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Supernormal profits: excess profit a firm makes above the minimum return necessary
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Economic loss: circumstances when individual or firm loses money
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Revenue max: firm attempts to sell at a price that achieves the highest sales revenue
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Productive efficiency: economy cant produce more of a good without sacrificing another good
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Allocative efficiency: all goods and services are optimally distributed among buyers
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Structure with many small firms selling similar products
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ASSUMPTIONS
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Large amount of small firms
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No barriers
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Large number of buyers and sellers
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Product differentiation
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Each firm has the same ability to set prices
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Monopolies are an extreme consequence of free-market economics and are often used to identify an individual that has complete or near-complete dominance of a market
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CHARACTERISTICS
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unfair edge over their competitors
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High barriers to entry
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Price makers
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Economies of scale
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ASSUMPTIONS
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One dominant firm
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Unique products with no close substitutes
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High barriers
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Price makers
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Economies of scale
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CAUSES OF HIGH BARRIERS
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Economies of scale
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Legal barriers (patents, copyright, licenses)
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Control of resources
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Aggressive tactics
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lack of competition
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Rigid prices
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Higher prices
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Reduced output
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Reduced options for consumers
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Market structure with small amount of firms and where each firm is interdependent, creating uncertainty
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ASSUMPTIONS
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Few dominant firms
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Interdependent firms
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Homogeneous or differentiated products
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High barriers
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Firms set prices
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PRICE COMPETITION
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Firms in oligopolistic competition participate in various price competitiveness strategies
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price wars
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Predatory pricing
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Limit pricing
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NON PRICE COMPETITION
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Increase consumer appetite and develop brand loyalty
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COLLUSIVE VS NON COLLUSIVE
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collusive: agreement between firms to limit competition by restrictive trade practices;
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Non collusive: These do not collude and act independently but are aware of other firms prices but not others decisions
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FORMS OF COLLUSION
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Cartels: An agreement between oligopolistic firms in the same industry to collude in fixing prices or to restrict the level of output in the market, thereby effectively acting as a monopolist.
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Informal collusion: Smaller firms could collude by following prices of larger firms. This limits competition and sets high prices
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Legislation: used to prohibit things such as takeovers or mergers that can occur among firms which would end up giving one firm more than a certain percentage of the market share.
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Regulation: markets setting up anti-monopoly commissions with the purpose of investigating markets and ensure that monopoly power is not being used against public interests
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Nationalization. when a government takes control of a private sector industry in order to run it as part of the public sector for the best interests of the public
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Profit maximization refers to the level at which a firm will produce the greatest amount of profit this is the output level at which marginal costs equal marginal revenue.
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EQUATIONS
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TR - TC → Profit is maximum at the level of output where TR - TC is greatest
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MR = MC → Profit is maximum at the level of output where MR = MC.
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Abnormal profit → AR > AC
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Normal profit → AR = AC
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Losses → AR < AC
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Market power refers to the ability a firm has to increase its profits by setting a price that is higher than the marginal cost.
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Degree of market power: The degree to which an individual firm is able to set prices will determine how competitive the market is
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**ADVANTAGES OF LARGE MARKET POWER
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Economies of scale and investment
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Research and development and innovation
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The natural monopoly justification
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Monopolistic corporations as agents of common good
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