What is in this topic?
 providing an explanation of:
 pricing and output decisions for perfectly competitive and/or
monopolist firms using marginal analysis
 efficiency of a market structure
 impact of a change in a market on the short and/or long run
pricing and/or output decisions of a firm using marginal
analysis
 the impact of a change in a market on the short and/or long
run pricing and/or output decisions of a firm using marginal
analysis
 a government policy to improve the efficiency of a monopoly
market
What is in this topic?
Marginal analysis refers to using marginal
revenue and marginal cost to determine the
output and pricing decisions of firms. This
includes demonstrating understanding:
• that perfectly competitive firms operate at
the profit maximising output where
P(=MR) = MC and are allocatively
efficient; and/or
• that monopoly firms operate at the profit
maximising output where marginal
revenue equals marginal cost (MR = MC)
but are allocatively inefficient.
Markets and behaviour?
Generally firms will operate
differently depending on the amount
of other firms they compete with!
IOk.
am Iyour
will twin
sell
brother
andoff!
I
mine
at 60%
will sell them
too! Ha ha ha….
Dam! You will
Huh!
I am
take
mythe
only sellerI am
of
customers
theseto
arrows!
I
going
have to
will
what I
docharge
something
aboutwant!
that! I will
sell mine at 50%
off!
Types of
markets
Monopoly
Monopsony
Perfect
competitor
Characteristics of Perfect
Competition
Examples of PC
Characteristics of Monopoly
Examples of M
Monopoly or Perfect Competitor?
Characteristics
of aMonopoly??
Perfect Competitor?
Hallensteins
ASB Bank
perfectly
competitive
firm
Fish and chip store
Wellington Trains
•Large
number of buyers and
Petrol station
Tucksellers
Shop
Sheep farmer
Stadium Food
•Perfect knowledge exists
•Firms are “price takers”
•Homogenous products (goods are
exactly the same)
•No barriers to entry and exit in the
industry.
Perfect Competitor - Costs
• For a perfect competitor
AR=MR=P=D.
• They face a horizontal demand curve
because their supply is relatively
small compared to the market
supply.
• Therefore they are a price taker.
1. Give 2 examples of the characteristics of
Perfect Competitors.
2. True or false, The demand curve for a perfect
competitor is perfectly inelastic
3. Profit maximising position for a perfect
competitor is AR=MR True or false?
4. Give an example of a perfect competitor.
5. Name the concept which suggests that an
individual perfect competitor is to small to
influence market price.
MC
MC
AC
MC
AC
MC
AC
I just made
a million
dollars!!!!
Yehaaaah!
MC
What happens to
PC super-normal
profits in the longrun? Where will
profits return to in
the long-run?
Darn gonit
I just lost 1
million
dollars!
MC
What happens to
PC sub-normal
profits in the longrun? Where will
profits return to in
the long-run?
I am a
Price
Makerrrrrrrrr
P($)
Q
12
1
10
2
8
3
6
4
4
5
Draw the
Revenue
curves.
TR
AR
What are the
differences in
the curve?
MR
MC
Sub-Normal Profits
Normal Profits
MC
AC
Super-Normal
Profits
Sub-Normal Profits
Normal Profits
MC
AC
Super-Normal
Profits
Normal Profits
MC
AC
Super-Normal
Profits
I am the market.
You shall not enter
Allocative Efficiency
Optimal distribution of
goods and services with
consumer preferences
in mind.
S
The price that
consumers are willing
to pay is equivalent to
their Marginal Utility. D
S
D
MC/S
MC/S
Allocative Efficiency
Allocative Efficiency
MC/S
VS
A business that is able to supply the whole market at a lower
price than two or more firms.
 Natural monopolies are entire industries not just single firms
 Usually involve some sort or network or infrastructure
 High initial start up costs act as the barrier to entry in the market
Natural Monopoly
Normal Monopoly
High set up costs, low marginal cost!
Market share and market power!
Can supply the market cheaper than
two or more firms operating in the
market!
Normally create dead weight loss by
restricting quantity or price to make
super-normal profits.
Normal monopolist
Revenue
For a normal monopolis
they will not experienc
Economies of Scale
throughout there
relevant output range
MC/S
AC
At the relevant range
of output, Average
Cost is rising!!!!!
AR/P/D
Relevant
range of
output
MR
Output
Natural monopolist
MC/S
What if more companies produced rail travel?
This isn’t an efficient use
of our resources
Natural monopolies produce at a lower cost than 2 or
more firms! But they want to maximise their profits!!!!!
MC/S
Revenue
S=D
MC = AR
AR/P/D
MR
Output
MC = MR
MC/S
Natural Monopolists will produce at
MC= MR.
Revenue
At this position the product is over
priced and under produced.
Pm
CS
This is not socially desirable!
Ps
PS
AR/P/D
Qm
Qs
MR
Output
MC/S
Revenue
AC
AR/P/D
MR
Output
Regulate so the natural
Monopoly produces at
MC=AR/S=D.
Price falls and quantity
increases! Allocative
efficiency achieved! Social
optimum and no dead
weight loss!
MC/S
Revenue
AC
AR/P/D
MR
Output
Problem is sub-normal
profit is made at this
position so may leave the
industry at this position.
Government will have to
subsidise. This can be a
high cost to the
Government
Regulate so the natural
Monopoly produces at
AC=AR
Price falls and quantity will
increases! dead weight loss
is reduced!
MC/S
Revenue
AC
AR/P/D
MR
Output
Problem of sub-normal
profit is removed and no
subsidy is required as the
Natural Monopoly will make
NORMAL PROFITS!
Problem: Natural Monopoly
will inflate their costs so
cannot accurately price at
AC