econ 206(a) tutorial 6 market structure and competition
TRANSCRIPT
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?