Matakuliah
Tahun
: F0882 - Economic Analysis
: 2009
ANALYSIS OF PERFECTLY COMPETITIVE
MARKETS, IMPERFECT COMPETITION
AND MONOPOLY
Chapter 2
Learning Outcomes
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Supply Behavior of The Competitive Firm
Supply Behavior in Competitive Industries
Special Casesof Competitiveness Markets
Efficiency and Equity of Competitive Markets
Patterns of Imperfect Competition
Marginal Revenue and Monopoly
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3
Supply Behavior of The Competitive Firm
Behavior of A Competitive Firm
 Profit Maximization
Why would a firm want to maximize Profits ? Recall that
profits equal total revenues minus total cost.
Profit are like the net earnings or take home pay of a
business. They represent the amount a firm can pay in
dividends to the owners, reinvest in new plant and
equipment, or employ to make financial investments. All
these activities increase that value of the firm to its
owners.
Bina Nusantara University
4
Perfect Competition
Perfect competition is the world of price-takers. A perfectly
competitive firm sells a homogeneous product (one
identical to the product sold by others in the industry). It is
so small relative to its market that it cannot affect the
market price; it simply takes the price given.
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5
Demand Curve Is Completely Elastic for a
Perfectly Competitive Firm
Implant these key points
in your long-term memory
1. Under perfect competition, there are many small firms,
each producing an identical product and each too small
to affect the market price.
2. The perfect competitor faces a completely horizontal
demand (or dd) curve.
3. The extra revenue gained from each extra unit sold is
therefore the market price.
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8
Add All Firms’ Supply Curves to Derive
Market Supply
Effect of Increase in Demand on Price
Varies in Different Time Periods
Long-Run Industry Supply
Depends on Cost Conditions
Constant-Cost Case
Increasing-Cost Case
Factors with Fixed Supply Earn Rent
Backward-Bending Supply Curve
The Concept of Efficiency
Allocative efficiency (or efficiency) occurs when no possible
reorganization of production can make anyone better off
without making someone else worse off.
Under condition all allocative efficiency, one person’s
satisfaction or utility can be increased only by lowering
someone else’s utility.
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16
At Competitive Equilibrium Point E, the Marginal
Costs and Utilities of Food Are Exactly Balanced
Competitive Market Integrates Consumers’
Demands and Producers’ Costs
Definition of Imperfect Competition
If firm can appreciably affect the market price of its output,
the firm is classified as an “imperfect competitor”
Imperfect competition prevails in an industry whenever
individual sellers have some measure of control over the
price of their input.
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19
Acid Test for Imperfect Competition Is
Downward Tilt of Firm’s Demand Curve
Varieties of Imperfect Competitors
1. Monopoly : A single seller with complete control over an
industry.
2. Oligopoly : the term oligopoly means “ few sellers”.
Few, in this context, can be a number as small as 2 or
as large as 10 or 15 firms.
3. Monopolistic Competition : this occurs when a large
number of sellers produce differentiated products.
Source of Market Imperfections
a. Cost and Market Imperfection
b. Barriers to Entry
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21
Market Structure Depends on Relative Cost
and Demand Factors
Marginal Revenue Curve Comes
from Demand Curve