econ 206(a) tutorial 6 market structure and competition

Econ 206(A) Tutorial 6

Market Structure and Competition

Perfect Competition - Assumptions

1. Many Producers/Sellers

2. No Barriers to Entry/Free Entry and Exit

3. Homogenous Products

4. Many Consumers

5. (also Perfect Knowledge and Homothetic Demand)

Short-Run Perfectly Competitive Equilibrium

Price Price pp

Quantity, Quantity, qq00

ACAC

D = AR = MRD = AR = MRp*p*

MCMC

MR = MCMR = MC

q*q*

costcostss

AbnormalAbnormal Profit = TR – TC Profit = TR – TC

Long-Run Perfectly Competitive Equilibrium

Price Price pp

Quantity, Quantity, qq00

LRACLRAC

DD11 = AR = MR = AR = MR

p*p*

MCMC

MR = MCMR = MC

q1q1

pp11

DD00 = AR = MR = AR = MR

Normal ProfitNormal Profit

Seminar Topic 1

1. Is Competition good for firms? Is it good for consumers?

Seminar Topic 2

• In what ways do markets characterised by perfect and imperfect competition differ?

Imperfect Competition

• Relax assumption that products are homogenous.

• Firms have some ability to change price (market power).

• Less is sold at a higher price.

• Production is not at the lowest point of AC curve (i.e. not least cost production).

Short-Run Imperfectly Competitive Equilibrium

Price, Price, pp

Quantity, Quantity, qq00

MCMC

D= D= ARAR

MRMR

ACACcostscosts

pp**

qq**

AbnormalAbnormal Profit Profit

Long-Run Imperfectly Competitive Equilibrium

Price, Price, pp

Quantity, Quantity, qq00

D= D= ARAR

MRMR

LRACLRACp1p1

qq11

NormalNormal Profit Profit

EE

MCMC

Seminar Topic 3

• How realistic is perfect competition?

Econ 206(A) Tutorial 7

Monopoly and Oligopoly

Relaxing Other Assumptions of Perfect Competition

• Focus on two related assumption:

1. Small number of producers (or only one)

2. Barriers to entry – include technology (patents), high fixed costs (setup costs), economies of scale.

How can firms limit entry of other firms?

1. Scale Economies

2. Legal Protection

3. Strategic Control

4. Strategic Behaviour (for instance price cutting)

Monopoly & Oligopoly

• Pure definition = only 1 producer.

• Legal definition = firm with more than 25% share of the market.

• When there is only 1 firm, the firm’s and the industry demand curve are the same.

• Oligopoly where there are only a smallnumber of large firms.

• These firms demand curves depend on each others production choices (so there is potential for collusion and cartels).

Questions

• How is a natural monopoly different to other types of monopolies?

• Why might we want to regulate monopolies?

Seminar Topics – Next Week

1. Is the market always the most efficient solutions to the problem of resource allocation?

2. What is meant by social opportunity cost? Provide examples.

3. Should students contribute to the cost of their university education?