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    CH-6 FINA 251

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    Minh Phạm

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    CH-6 FINA 251

    Uploaded by

    Minh Phạm
    6 views22 pages

    Copyright

    © © All Rights Reserved

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    Copyright:

    © All Rights Reserved
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    Download as ppt, pdf, or txt
    6 views22 pages

    CH-6 FINA 251

    Uploaded by

    Minh Phạm

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 22

    Chapter - 6

    Market Structure

    Pure Competition
    Classification of Market
    Structure
    Market is a place where buyers and sellers meet and
    exchange goods or services. There are certain conditions
    which create the structure of a market. It classified to:

    1- Pure (Perfect) Competition

    2- Monopolistic Competition

    3- Oligopoly

    4- Monopoly

    2
    Pure Competition
    A purely competitive industry has the
    following characteristics:
    1- Many sellers

    2- Low barriers to enter

    3- Competitors’ products are identical

    4- Buyers have perfect information

    3
    Pure Competition
    The objective of any firm is, produce the quantity of
    output that maximizes its economic profit.
    Profit = Total Revenue (TR) - Total Cost (TC)

    Example 1
    A firm sells 100 products at $2.00 each. Its total
    cost is $160. What is its profit?
    4
    Profit Maximization of a Purely
    Competitive Firm

    Example 1 answer
    Profit = TR – TC
    TR = P x Q = $2 x 100 = $200

    Profit = $200 - $160 = $40

    5
    Profit Maximization of a
    Purely Competitive Firm
    Because one firm in pure competition is a small part of the entire market, it can
    supply more products to the market without significantly affecting the supply
    and the price.

    For example, if the market price is $2, then a purely competitive firm can sell
    100 products at $2, 110 products at $2, or 120 products at $2.

    6
    Marginal and Average
    Revenue
    Marginal revenue
    is the additional revenue per product. For example,
    if at Q = 100, TR = $200, and at Q =110, TR = $220, then MR = ∆TR / ∆Q
    = $20 / 10 = $2.

    Average revenue
    is the revenue per product. If at Q = 100, TR = $200, then AR = TR / Q
    = $200 / 100 = $2.

    7
    Marginal and Average
    Revenue
    Demand and revenue for a purely competitive firm, which sells a
    product at $2 is as follows:

    Q Price TR MR AR
    0 $2 $0 - -
    100 $2 $200 $2 $2
    110 $2 $220 $2 $2
    120 $2 $240 $2 $2
    130 $2 $260 $2 $2

    We conclude at pure competitive firm : P = MR = AR


    8
    Profit Maximization of a
    Purely Competitive Firm
    A Purely Competitive Firm’s Total Revenue Curve

    Price,
    Revenue Total Revenue

    240
    220
    200

    100 110 120 Quantity


    9
    Maximization of a
    Purely Competitive
    Firm
    A Purely Competitive Firm’s Demand, Marginal,
    and Average Revenue Curves

    Demand,
    AR, MR,
    Price
    2.00 D = P = MR =
    AR

    100 110 120 Quantity

    10
    Profit and Loss

    Economic Profit TR > TC P > ATC


    ATR > ATC
    No profit or loss TR = TC P = ATC
    Normal Profit ATR = ATC
    ) Break-Even Point (
    Loss but it can continue in TR < TC P < ATC
    production TR > TVC P > AVC

    .Loss TR = TVC P = AVC


    ) Shut-Down Point (

    Loss .Close the firm and TR < TVC P <AVC


    stop production
    Achievement Economic
    Profit
    AR, MR, MC
    Price, Costs ATC

    EP AVC
    2.00 D = MR = AR = P

    Quantity

    EP : Equilibrium Point; point of profit maximization.


    MR = MC
    12
    Profit Maximization of a
    Purely Competitive Firm
    The Profit-maximizing Quantity

    AR, MR, MC ATC


    Price, Costs MR=MC

    2.00 D = MR = AR = P
    AVC

    Pam Quantity

    13
    Profit Maximization of a Purely
    Competitive Firm
    The Profit Area

    AR, MR, MC
    MR=MC ATC
    Price, Costs

    2.00 D = MR = AR
    1.80
    AVC

    100 Quantity

    14
    Purely Competitive Firm
    The Case of a Loss

    AR, MR, MC
    Price, Costs ATC

    1.60 AVC D = MR = AR = P

    Qlm Quantity

    15
    Purely Competitive Firm
    The Case of a Loss and a Shut-
    down

    AR, MR, MC ATC


    Price, Costs

    AVC
    1.20 D = MR = AR = P

    Quantity

    16
    The Long-run Equilibrium
    Price and Quantity

    AR, MR, MC ATC


    Price, Costs

    AVC
    1.75 D = MR = AR

    Qlr Quantity

    17
    Example 1:
    If the price of one unit is 10 S.R. , the equilibrium
    quantity = 100 units or (production) and the
    average cost at the equilibrium point = 8 S.R.
    - Calculate the firm’s profit?
    - Name the kind of it is profit?

    18
    Example 2 :
    If the price of one unit is 9 S.R. , the equilibrium
    quantity = 90 units or (production) and the
    average cost at the equilibrium point = 9 S.R.
    - Calculate the firm’s profit?
    - Name the kind of it is profit?

    19
    Example 3 :
    If the price of one unit is 8 S.R. , the equilibrium
    quantity = 80 units or (production) and the
    average cost at the equilibrium point = 9 S.R.
    - Calculate the firm’s profit?
    - Name the kind of it is profit?

    20
    Exercise : This table give some data of
    pure
    Competitive Firm X.

    Quantity - Q Price - P AVC ATC MC


    0 18 0 - -
    1 18 5 35 5
    2 18 4.5 19.5 4
    3 18 4 14 3
    4 18 5 12.5 8
    5 18 6 12 10
    6 18 8 13 18
    7 18 10 14.3 22
    8 18 12 15.8 26
    9 18 15 18.3 39
    10 18 20 23 65
    By using the previous table answer this questions:
    1-Dose firm X earn profit when its produce 6
    units.
    2- How many units the firm X must produce to
    maximize its profit.
    3- Calculate the firm profit.

    22

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