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Week 7 Lecture - ECON1001 Week 7 Perfect Competition Topic...

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ECON1001 Week 7 Perfect Competition
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2 Topic Outline Explain why a firm in perfect competition is a price taker Derive the supply curve of a firm in perfect competition Explain how price and output are determined in a competitive industry in the short run in the long run Predict the effects of market changes
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3 Markets and the Competitive Environment Economists identify four broad market types: Perfect competition Monopolistic competition Oligopoly Monopoly
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4 Perfect Competition Many firms each selling an identical product Many buyers No restrictions on the entry of new firms
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5 Monopolistic Competition Large number of firms selling slightly different products Many buyers No restrictions on the entry of new firms Product differentiation gives a monopolistically competitive firm an element of monopoly power.
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6 Oligopoly A small number of firms compete Product could be identical or differentiated Could be substantial barriers to entry Strategic interaction is important
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7 Monopoly A single supplier No close substitutes exists for the product Substantial barriers to entry of new firms
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8 Market Structure Characteristics competition competition Oligopoly Monopoly Number of firms Many Many Few One in market Product Identical Differentiated Either identical No close or differentiated substitute Barriers to entry None None Moderate High Firm’s control None Some Considerable Considerable over price or regulated Concentration ratio 0 Low High 100 Examples Wheat, meat office cleaning, Automobiles, Local water car repairs chocolate bars, distribution, vitamins Perfect Monopolistic
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9 Measuring Market Power The Concentration Ratio One measure used to describe market structure N-firm concentration Measures the percentage of the value of sales accounted for by the N largest firms in the market Range from 0 percent to 100 percent
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10 Measuring Market Power Concentration ratios are an imperfect measure of market conditions Market definition Product Geography Barriers to entry Doesn’t measure behaviour
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11 Perfect Competition Characteristics of Perfect Competition Many firms Each firm sells an identical product No restrictions on entry into the industry Firms and buyers are well informed about prices of the products of each firm In a perfectly competitive industry, firms believe they are too small to influence market price They are price takers
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12 Economic Profit The firm’s goal is to maximise economic profit. Economic profit = revenue – costs Recall that costs reflect all opportunity costs, including normal profit (the return to the entrepreneur of the best alternative business) Revenue = price*quantity
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13 Economic Profit and Revenue Total revenue is the value of a firm’s sales Total revenue = P × Q Marginal revenue (MR) Change in total revenue resulting from a one-unit increase in quantity sold.
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