Price and Output Determination in Various Market Structure

8/20/2019 Price and Output Determination in Various Market Structure

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Price andOutput

Determination inVarious

MarketStructureAreta, Quennie BSACT3Coria, QueenaDeximo, LayroseMatao!, "ikki#amos, $oyce


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%ntroduction

• A &rm's decisions concernin! price and produ

)ary dependin! on t*e c*aracter o+ t*e in(*ic* it is operatin! At one extreme (e &producer dominatin! a market- at t*e ot*er to+ &rms, eac* suppyin! a minute +raction ooutput Bet(een t*ese extremes ies an

)ariety o+ market structures


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PureCompetition

• (*ere t*ere are many&rms to a marketsituation t*at

produces simiar!oods .*omo!enousproducts/

• 0irms can +reey enteror exit t*e market

• 0irms are price takers


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Output Decision

• %n a per+ect competition market cannot

t*e market price o+ its product• %+ 0irm %ncreases price t*ey (oud oosecustomers

• Can se any amount o+ !oods as on! as

&rm *as its capacities


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2uii4rium o+ t*e industry

• 0irm5 produces *omo!enous products so t*at 4e competition in units o+ !oods

•

Price and uantity are determined 4y t*e inteo+ demand and suppy

• Tota output 6 Tota demand is 2Q7%L%B#%7M


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Price and output in a per+ecty competitimarket

• %t is important +or an industry to kno( (dri)es demand and suppy and aso to k(*at determines prices and re)enues

• Demand s*i+ters8 prices, income, ad)ertprices o+ ot*er products

• Suppy s*i+ters8 input cost, tec*noo!y, r

and de)eopment


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#e)enue o+ a competiti)e &rm

• Pro&t maximi9ation 6 TOTAL #2V2"72 : TOTA

• Tota re)enue 6 P x Q

• Tota re)enue is proportiona to t*e amount o+

• A)era!e #e)enue5 tes *o( muc* re)enue a &recei)es +or t*e typica unit sod

• A)era!e #e)enue6 TOTAL #2V2"72;Q7A"T%T


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Pro&t maximi9in! 4y comparin!M# and MC

• Mar!ina cost 6 c*an!es in totacost;c*an!es in uantity

• Mar!ina re)enue 6 c*an!es in totare)enue; c*an!es in uantity

• C*an!e in pro&t6 M#5MC


9/482uii4rium o+ t*e &rm

• T*e &rm is in euii4rium

(*en it maximi9es its pro&t

• 2uii4rium output5

output t*at !i)es maximum

pro&t to t*e &rm

• =ori9onta P5ine5

0irm's per+ecty competiti)e

and act as demand cur)e

+or t*e &rm

=ori9onta 4ecause t*e &rm s

price taker


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Suppy cur)e Pro&t maximi9ation

%n a per+ecty competiti)e market a &rm'sPrice6A)era!e #e)enue6 Mar!ina #e)enue

•

> pro&ts are maximum ony at t*e point (*erMar!ina #e)enue6 Mar!ina cost exacty eu.M#6MC/

• ? MC s*oud *a)e positi)e sope

• 3 MC @ M# t*e &rm s*oud decrease its outpu

• MC M# &rms s*oud increase its output


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2uii4rium o+ t*e &rm

• M#6 A#

• MC cur)e is cuttin! M# cur)e at t(o paces T and #

•

P6 M# 6 MC 6 AC• 0irm produces at minimum o+ a)era!e

costs


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Mar!ina cost cur)e and t*e &rms suppydecision

• MC cur)e is up(ard sopin!

• ATC is u5s*aped

• Mar!ina5cost cur)e crosses t*e a)era!e tota cur)e at t*e minimum o+ a)era!e tota cost

• Since &rm is a price taker its M#6P


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Suppy cur)e o+ t*e &rm in a competiti)emarket

• Various uantitiest*e &rm (i

suppy at eac*price

• MC Depicts t*e&rm's suppycur)e

• P rises productionaso rises


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S*ort run 2uii4rium o+ a competiti)e +o"orma pro&ts

• M#6 MC at 2

• 2uii4riumoutput6 OQ

• Since A#6ATC or OP62Q, t*e &rm is ust earnin! anorma pro&t


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S*ort run 2uii4rium8 supernatura pro&

• %n t*e s*ort run a &rm (i attain euii4rium pat t*e same time it may earn supernatura pronorma pro&ts or osses dependin! upon its co

condition• Supernatura Pro&ts5 A)era!e #e)enue @ A)er

cost

• "orma pro&ts5 (*en t*e &rm meets its tota acost A)era!e #e)enue6 A)era!e tota cost .A


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Supernatura pro&ts in s*ort run

• At 2, M#6 MC• M#6 =ori9onta ine• MC6 75s*aped t*at

cutM# cur)e at 2• OQ is t*e euii4riumoutput +or t*e &rm•

Pro&t per unit 2B .A#5ATC/• A# is 2Q• ATC is BQ• Tota pro&ts6 AB2P


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S*ort run decision to s*ut do(n

• S*utdo(n5 s*ort run decision to not produce adurin! speci&c period o+ time 4ecause o+ curremarket conditions

• 2xit on! run decision to ea)e t*e market

• 0irm t*at s*uts do(n temporariy sti *as to p&xed costs T*us exits t*e market doesn't *a)any cost at a


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S*utdo(n

• S*utdo(n %+ t*e tota re)enue t*at it (oud !et is )aria4e costs o+ production .T# VC/

• S*utdo(n 4y di)idin! T#;Q VC;Q

• S*utdo(n %+ t*e price o+ t*e !ood is ess t*at t*e a))aria4e cost o+ production

• %+ t*e &rm produces anyt*in!, it produces t*e uant(*ic* MC6P .price o+ a !ood/

• Simpi+y PATC

• %+ t*e price AVC 4etter to s*utdo(n


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0irm's on! run to exit or enter a market

• 2xit %+ t*e tota re)enue t*at it (oud !et is cost .T#TC/

• By di)idin! T#;QTC;Q

• 2xit i+ PATC

• T*e &rm c*ooses to exit i+ t*e price o+ its !oodess t*an t*e a)era!e tota cost o+ production


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• %+ P @ ATC6 Pro&t is positi)e

• %+ P ATC6 Pro&t is ne!ati)e

• T*e process o+ entry and exits end ony (*en price ana)era!e tota cost are dri)en to euaity


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Monopoy

A &rm t*at is t*e soeseer o+ a product(it*out cosesu4stitutes


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C*aracteristics o+ Monopoy

Sin!e Seer

"o Cose Su4stitutes

Price Maker

Bocked 2ntry

Ad)ertisin!


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Barriers to entry .T*ree Sources/

Monopoy #esources

a key resource reuired +or production is o(ned 4y a s

Eo)ernment5 Created Monopoies

t*e !o)ernment !i)es a sin!e &rm t*e excusi)e ri!*tproduce some !ood or ser)ice

T*e Production Process

a sin!e &rm can produce output at a o(er cost t*an

ar!er num4er o+ producers


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=o( Monopoies Make Production and PDecisions

• Monopoy VS Competition

• Monopoy's #e)enue

• Pro&t Maximi9ation

• Monopoy's Pro&t


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Monopoy VS Competition


26/48

Monopoy's #e)enue


27/48

Pro&t Maximi9ation

0or a compe

&rm 8 P 6 M0or a monop@ M# 6 MC


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Monopoy's Pro&t

Pro&t 6 TPro&t 6 .

TC;Q/ x QPro&t 6 Q


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31/48

Price Discrimination

• T*e 4usiness practice o+ sein! t*e sam

at di1erent prices to di1erent customers• "ot possi4e in competiti)e market


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Pu4ic Poicy To(ard Monopoies

• %ncreasin! competition (it* antitrust a(

•

#e!uation• Pu4ic O(ners*ip

• Doin! "ot*in!

Monopoistic


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o opo s cCompetition

• T*e mode o+ monopoisticcompetition descri4es a

common market structurein (*ic* &rms *a)e manycompetitors, 4ut eac* oneses a si!*ty di1erentproduct

• Fas identi&ed in t*e >G3Hs

4y 2d(ard C*am4erin and $oan #o4inson


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C*aracteristics o+ Monopoistic Competi

>Many seers

?Product di1erentiation

30ree 2ntry


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0our Main Types o+ Di1erentiation

• P*ysica Product Di1erentiation

• Marketin! Di1erentiation

• =uman Capita Di1erentiation

• Di1erentiation t*rou!* Distri4ution


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Ad)anta!es o+ Monopoistic Competition

• T*ere are no si!ni&cant 4arriers to entry

t*ere+ore markets are reati)eycontesta• Di1erentiatiion creates di)ersity, c*oice

utiity

• T*e market is more eIcient t*an mono

ess eIcient t*an per+ect competition


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Disad)anta!es o+ Monopoistic Competi

• Some di1erentiation does not create ut

!enerates unnecessary (ates• Assumin! pro&t maximi9ation, t*ere is

aocati)e ineIciency in 4ot* t*e on! as*ort5run


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P ATC 5LOSSP @ ATC 5 P#O0%TP 6 ATC 5 B#2AJ2V2"

Oi


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Oi!opoy

• a market structure in

(*ic* t*ere is a +e(dominant &rms• are ar!e enou!* to

inKuence t*e marketprice

• products can 4e

*omo!enous ordi1erentiated


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T*e Coision Mode

•

Carte : a !roup o+ &rms t*at !ets to!etmakes price and output decisions ointy

• Tacit cousion : occurs (*en &rms end uprices (it*out a speci&c a!reement or (

suc* a!reements are impicit


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T*e Price Leaders*ip Mode

• Price eaders*ip : a +orm in (*ic* one d&rm sets prices and a smaer +orms in industry +oo( its pricin! poicy

• #esuts mi!*t 4e simiar 4ut not identicacousion mode


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T*e Cournot Mode

• %ntroduced 4y t*e mat*ematician AntoinAu!ustin Cournot

• 0ocused on oi!opoy (it* ony t(o &rmsproducin! identica products and not co

• Duopoy : a t(o &rm oi!opoy


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Eame T*eory

•

Anay9es t*e c*oices made 4y ri)a &rmpeope and e)en !o)ernments (*en t*etryin! to maximi9e t*eir o(n (e54ein!anticipatin! and reactin! to t*e actions ot*ers in t*eir en)ironment


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Eame T*eory

• Dominant strate!y : a strate!y t*at is 4matter (*at t*e opposition does

• Prisoner's diemma : a !ame in (*ic* t*payers are pre)ented +rom cooperatin!(*ic* eac* *as a dominant strate!y t*at*em 4ot* (orse o+ t*an i+ t*ey coud co


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Eame T*eory

• "as* euii4rium : %n !ame t*eory, t*e resut

payers payin! t*eir 4est strate!y !i)en (*atcompetitors are doin!

• Tit5+or5tat strate!y : a repeated !ame strate!(*ic* a payer responds in kind to an opponen


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Summary


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"e(s Artice reated to t*e Topic

Philippines Rethinks Its Monopo

Competition Act sets up antitrust panconsumers !ripe a4out *i!* 4is

T*e 2nd


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T*e 2nd

T*at %n A T*in!s,EOD MA<

B2ELO#%0%2DAreta, Quennie BSACT3Coria, QueenaDeximo, LayroseMatao!, "ikki#amos, $oyce

Price and Output Determination in Various Market Structure

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