AE0013 - Chapter 5.ppt - CHAPTER 5 MARKET STRUCTURE PERFECT...

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CHAPTER 5 MARKET STRUCTURE: PERFECT COMPETITION AND MONOPOLY
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LEARNING OUTCOME At the end of this chapter, student will be able to: Define the theory of a firm and classification of a market. Explain total approach and marginal approach. Explore the characteristics of a perfect competition. Explain the short-run and long-run equilibrium in a perfect competition. Define a monopoly market and its characteristics. Explain the short-run and long-run equilibrium in a monopoly.
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DEFINITION AND OBJECTIVES OF A FIRM Definition of a Firm A firm is an institution that buys or hires factors of production and organizes them to produce and sell goods and services. A firm is an independent unit of producing goods and services for sale. Objectives of a Firm The main goal or objective of a firm is to maximize profit and to minimize the cost.
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ECONOMIC PROFIT AND ACCOUNTING PROFIT Economic Profit Economic profit is defined as the total revenue minus the implicit and explicit cost. Consider both explicit and implicit cost EC = TR – [Explicit Cost + Implicit Cost] Accounting Profit Accounting profit is defined as the firm’s total revenue minus the explicit cost. Consider only explicit cost AC = TR – Explicit Cost
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CONCEPT OF REVENUE TOTAL REVENUE (TR) The total amount received from the sale of a firm’s goods and services Total Revenue (TR) = Price (P) x Quantity (Q) AVERAGE REVENUE (AR) Average revenue is the total revenue per unit output sold . Average revenue (AR) is also equal to the price (P) of the good. Average Revenue (AR) = Total Revenue (TR) Quantity (Q) AR = P x Q = PRICE Q
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CONCEPT OF REVENUE (cont.) MARGINAL REVENUE (MR) The change in total revenue resulting from one unit increase in quantity sold. Marginal Revenue (MR) = Change in Total Revenue Change in Quantity MR = TR/ Q
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CONCEPT OF REVENUE (cont.) Case 1: Under Perfect Market Quantity Price Total Revenue (TR) Average Revenue (AR) Marginal Revenue (MR) 1 10 10 10 10 2 10 20 10 10 3 10 30 10 10 4 10 40 10 10 5 10 50 10 10 AR, MR and price are same when the price is constant. The graph Shows the horizontal line at price of RM10 which indicates that MR = AR = Price . Quantity 0 5 10 15 10 20 30 40 50 AP, MP Price AR=MR=DD
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CONCEPT OF REVENUE (cont.) Case 2: Under Imperfect Market Quantity Price Total Revenue (TR) Average Revenue (AR) Marginal Revenue (MR) 1 10 10 10 10 2 9 18 9 8 3 8 24 8 6 4 7 28 7 4 5 6 30 6 2 AR equal to but MR is less than price when price changes. The graph shows the AR and MR downward sloping and MR curve lies below AR curve. Quantity 0 5 10 15 10 20 30 40 50 AP, MP Price AR=DD MR
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TOTAL APPROACH Under Perfect Market: TR curve is straight line through origin. The firm maximum profits at ON output because the vertical distance between TR and TC curve is maximum.
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