week6_ch100.pptVIP

Four Basic Market Models There are four market models with varying degrees of competition in supply: pure competition pure monopoly monopolistic competition oligopoly Pure Competition Distinguishing characteristics: Very large number of sellers Standardised (homogeneous) product ‘Price taker’ no individual firm can influence market price Free entry (and exit) Absence of non-price competition (based on product quality, advertising or sales promotion) Buyers know that the products of all firms in the industry have the same feature. Pure Competition (cont.) Examples: Precise examples of pure competition are rare Agricultural commodities fit quite well with competitive model various agricultural crops fruits livestock Chapter 10Pure Competition Demand to a Competitive Firm Unable to affect price—a competitive seller is a price taker, not a price maker Sellers face a perfectly elastic demand curve Demand schedule is basically the revenue schedule Revenue Concepts Average revenue (AR): Total revenue per unit of a product sold Total revenue (TR): Total number of dollars received by a firm or firms from the sale of a product Marginal revenue (MR): Additional revenue received resulting from the sale of an extra unit of output Revenue Under Competitive Conditions P = AR = MR Demand curve Profit Maximisation in the Short Run Two approaches to profit maximisation: Total Revenue–Total Cost Approach Marginal Revenue–Marginal Cost Approach Profit Maximisation in the Short Run (cont.) Total Revenue–Total Cost Approach Three related questions: Should the firm produce? Produce in the short run if the firm can make a profit, or a loss below the fixed costs If so, what amount? Produce an output that will maximise profits or minimise losses Will production result in a profit? Profit Maximisation:Total Revenue—Total Cost Should the firm produce? Yes, if TR exceeds TC or if TC exceeds TR by some amount less than TFC (the firm will maximise its profits by producing) If so, wh