Competition

April-24-09
8:18 AM

Competition

Perfect Competition

- There are many sellers in this market

- Sellers have no control over price
- The sellers are all price takers
- Price is determined by interaction of demand and supply
- Goods that are sold similar in nature
- No restriction t enter this market
- Marginal revenue curve is flat
- Price = marginal revenue
- e.g. Farmers

Monopolistic Competition

- There are a lot of sellers in this market, not as many as perfect competition
- Sellers have a little control over price
- Products are similar, but can be different in packaging and style
- There are few restrictions for entry
- Competition occurs through advertising
- Price > marginal revenue
- E.g. Restaurants, convenience stores

Oligopoly Competition

- There are a few sellers in the market place, 3-10

- Have a fair amount of control over price
- Products are different in model or style, example is cars
- There are many restrictions in this area by the government
- Competition occurs through advertising
- Demand curve is kinked
- E.g. Car manufacturing, telephone companies

Monopoly

- Only one seller in the market

- This seller has complete control over price
- The product that is sold is very unique
- Heavy government regulations and restriction of entry into this market
- Marginal revenue is downward sloping
- Price is . Marginal revenue
- E.G. Ontario Hydro

Cost Curves In Determining Output Level

Fixed cost - are usually a cost that don't change in the short run. Known as overhead. Costs that do not
change when total output produced changes.
I.e. RENT

Variable Cost - costs that can change in the short run. Known as direct costs. Costs that change directly
as output changes. If output increases goes up total variable costs will increase.
I.e. Cost of materials

Total cost = variable cost + fixed costs

Unit 7 - Types of Competition Page 1

 Total cost = variable cost + fixed costs

Average variable cost = variable costs / output

Average fixed cost = fixed cost / output

Average costs = total costs / output

Marginal costs = change in total costs / change in output

Total revenue = price * output

Marginal revenue = change in total revenue / change in output

Profit = total revenue - total costs

Fixed Costs : fixed cost does not change as quantity increases

Fixed
Cost

Quantity

Variable Costs : Increase as production increases. Will increase at an increasing rate. At first variable
cost will increase at a decreasing rate, however when companies reach diseconomies of scale, VC will
increase at a increasing rate.

TC
VC
Variable
Cost

FC

Quantity

Total Cost : to draw total cost all we have to do is to add fixed cost curve to variable cost line. For this all
we do is translate to variable cost curve up to the fixed cost curve and run parallel to the variable cost
curve.

Unit 7 - Types of Competition Page 2

 curve.

Total Revenue : TR is just price * quantity sold. Therefore linear.

Total
Revenue

Quantity

Average Fixed Cost - fixed cost does not increase as quantity increase, average fixed cost to decrease as
quantity increases

Average
Fixed
Cost

Quantity

Average Variable Costs - average variable cost will initially decrease until a minimum then increase.
Parabola.

Unit 7 - Types of Competition Page 3

 Average Cost
Average
Variable
Cost
Average
Variable Cost

Average Fixed Cost

Quantity

Average Cost - add average fixed and variable cost. Average fixed cost is asymptote to the quantity Axis.

Marginal Cost - draw marginal cost calculate the change in TC and compare to change in quantity.
Decreases then increases it will intersect average variable cost and average cost at their minimum
points. This curve ends up being the supply curve.

Marginal Cost
Average Cost
Marginal
Cost

Average
Variable Cost

Average Fixed Cost

Quantity

Average Revenue - recall TR was a linear line with a positive slope this will cause the average revenue
line to be the direct inverse. It will look like demand curve.

Unit 7 - Types of Competition Page 4

Average
Revenue

Quantity

Marginal Revenue - difference between total revenue and divide it by the change in quantity. Steeper
slope then demand curve lying on the inside of the demand curve. However, for perfect competition it
will be flat.

Marginal
Revenue

Marginal
Revenue Average Revenue

Quantity

Unit 7 - Types of Competition Page 5

Competition Cont.
April-28-09
8:25 AM

Price Takers - a firm in perfect competition that cannot influence the price of a good or service.
Firms in perfect competition called price takers. Faces perfectly elastic demand.

Economic Profit - total revenue - total cost. If costs are greater then revenue, then there is a economic
loss, if they equal then it's break-even/normal profit, and if the revenue is greater then it is economic
profit.

Measured by the total vertical distance between TR and TC

Short run - timeframe which each firm has a given plant, and number of firms is fixed. Short run
fluctuations such as price. Decide:
1. Produce or shutdown
2. To produce, and what quantity

Long run - time frame, each firm change size of its plant and decide whether or not to leave the
industry. Other firms can decide to leave or enter. Long run: plant size, and number of firms change.
Decide:
1. Whether to increase/decrease plant size
2. Whether to stay in industry or leave

Marginal analysis -compare MR with MC.

If MR > MC = Economic Profit - total output increases, economic profit increases
If MR < MC = Economic Loss - Profit decreases if output increases, and Economic profit increases if
output decreases
If MR = MC = Economic Profit is maximized.

Profit Maximizing Output

MC
MR & MC Profit Maximization
Point Economic Loss
MR

Profit

Quantity

Three Possible Profit Outcomes in the Short Run

ATC = Average Total Cost
Normal Profit
MC ATC

Price
& Cost

MR

Unit 7 - Types of Competition Page 6

 Normal Profit
MC ATC

Price
& Cost

MR

8 Quantity

Economic Profit
MC ATC

Price
& Cost Profit MR

9 Quantity

Economic Loss
MC ATC

Price
& Cost

Loss
MR

7 Quantity

If price = minimum average total cost = break even. If Price > ATC then economic profit, if Price < ATC
then economic loss.

Shutdown Point - when the output and price at which the firm covers its total variable cost. AKA BREAK
EVEN

Unit 7 - Types of Competition Page 7

 MC ATC

Price MR2
& Cost MR1
17 MR0

Shutdown Point

7 Quantity

Short run supply curve -

S
Price

17
T

7
Quantity

Made up by MC curve at all points above minimum average cost and the vertical axis at all prices below
minimum AVC.

Short run industry supply curve - shows the quantity supplied by the industry at each price when the
plant size and number of firms are constant. Quantity supplied is the sum of quantities supplied y all
firms in the industry at that price.

Industry Supply Curve

Price
S1

17

7
Quantity

Unit 7 - Types of Competition Page 8

If at shutdown, some firms will produce 7 per day, others 0.

Unit 7 - Types of Competition Page 9

 Monopolistic
April-30-09
8:48 AM

Market Power - ability to influence the market, and in particular the market price, by influencing the
total quantity

Monopoly - industry that produces a good or service which no substitute, and one supplier protected by
a barrier preventing entry.

2 distinct features
- No close substitutes
- Barriers to entry
○ Legal or natural constraints that protect a firm from competitors
- Legal Barriers
○ Legal monopoly is a market in which competition and entry are restricted by the granting of a
public franchise, government licence, patent, or copyright
○ Public franchise is exclusive rights to supply good or service
○ Patents
○ Copyrights
- Natural Barriers
○ Natural monopoly
○ Industry which one firm can supply the entire market at a lower price than two or more firms can

NATURAL MONOPOLY

Price

ATC

Quantity

Monopoly Price-Setting Strategies

- Price discrimination
○ Practise of selling different units of a good or service for different prices.
○ Different customers pay different prices
○ Limited to monopolies that sell services that cannot be resold
- Single Price
○ Firm that sell each unit of output at the same price to all customers

A Single Price Monopoly's Output and Price Decision

Unit 7 - Types of Competition Page 10

 A Single Price Monopoly's Output and Price Decision

- Price and marginal revenue

Demand and Marginal Revenue

MR Demand

Marginal Revenue and Elasticity

- Single price monopoly marginal revenue is related to the elasticity demand for its good
In a monopoly, demand is always elastic.

Intercept of MR and MC = optimum output

Change in Demand
- Increase in demand causes a rise in price and output and higher total profits for monopolist
- A change in demand will cause a change in price, output and profits

Oligopoly
- Rival firms follow price cut make demand inelastic, but firms are assumed not follow a price increase
(making demand relatively elastic)

Unit 7 - Types of Competition Page 11

 Oligopoly
May-04-09
8:30 AM

Oligopoly -market structure that small number of firms compete

Kinked Demand Curve Model

For oligopoly

1. If it raises its price, others will not follow

2. If it cuts its price, so will the other firms

MC 1
P
MC 0

D
MR

Dominant Firm Oligopoly

Unit 7 - Types of Competition Page 12

Price
s 10

Quantity

Unit 7 - Types of Competition Page 13

Extra Notes
May-05-09
7:53 PM

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