Behaviour of a firm depends on features of the
market and its production costs.
Perfect competition: a market in which buyers and
sellers are so numerous and well informed that
the market price of a commodity is beyond the
control of individual buyers and sellers.
Monopoly: a market structure characterized by a
single seller, selling a unique product in the market
Monopolistic competition: several or
many sellers each produce similar, but
slightly differentiated products. Each producer can
set its price and quantity without affecting the
marketplace as a whole.
Oligopoly: a market form in which
a market or industry is dominated by a small
number of sellers (oligopolists).
Number of firms
• 1 – many
• Can individual firm influence the price?
Nature of the product
• Homogeneous (identical) or heterogeneous
(differentiated).
• Consumers decide
Entry
Ease or difficulty of entry/exit to/from market.
Information (or degree of knowledge)
Complete or incomplete knowledge of market
conditions.
Collusion
When two or more sellers enter into an
agreement, to limit competition between
themselves
Control over the price of its product
Price makers or price takers?
Demand curve for the firm’s product
What shape is the firm’s demand curve?
I.e. what scope for “making” or “setting” their
own prices.
Long run economic profit in the long run
Ability to earn economic profits in the long run.
• Firms want to maximise profit.
– Economic profit = revenue - cost (explicit &
implicit).
• Taking revenue and costs into account, 2
decisions have to be taken…
1. Is it worth producing at all?
2. If so, what level of production will maximise
profit minimise losses?
The shut-down rule
• Produce only if total revenue ≥ total variable
cost
OR
• Produce only if average revenue (ie price) ≥
average variable cost.
• LR - all costs are variable.
• Production in LR only if total revenue > all
costs of production.
• SR – fixed & variable costs.
• Should production occur if…
– total revenue > total costs
– The answer is NO!.
The plane can seat 200 passengers
Fixed costs: R150 000
• Pilot & cabin crew salaries
• Fuel
• Airport taxes
Variable costs: R50
• Meal/passenger
The plane is due to leave in 3 hours and there are still 25 seats
unsold…
• What should SAA sell the remaining seats for to make it
worth their while financially?
• Once established, no escaping fixed costs (even if output
is zero).
•
•
•
•
If total revenue > total variable costs
(or average revenue > average variable costs)
difference contributes towards fixed costs.
DECISION?: Keep producing in short run - even though
economic loss made.
• If total revenue = total variable costs
• (or average revenue = average variable costs)
• DECISION?: Makes no difference whether you continue
or shut down as loss is the same in both cases.
• If total revenue < total variable costs
• (or average revenue < average variable costs)
• DECISION?: SHUT DOWN as each unit is contributing
to greater losses.
• Firms produce a quantity where profits are
maximised (or losses minimised).
• Profit maximised where positive difference
btwn. total revenue and total cost is the
greatest.
OR…
• Profit maximised where marginal revenue
(MR) is equal to marginal cost (MC).
Consider what happens if MR ≠ MC
• If MR > MC
– Firm makes profit on last (extra) unit produced.
– Therefore output should be expanded.
• If MR < MC…
– Firm makes loss on production of additional unit of output →
decreasing profit
– Therefore output should be reduced.
• If MR = MC…
– profits are maximised
POINT
a:
MR
(R10)
MC
(R4)
R6
POINT
POINTe:d:
c:
b:MR
MR(R10)
(R10)–––MC
MC(R12)
(R8)
(R10)
(R6)===R2
-R2
R4
R0
Which one of the following statements is correct?
A. Any firm maximises its profit (or minimises its losses)
where marginal revenue (MR) = marginal cost (MC).
B. Monopolistically competitive firms produce
homogenous (standardised) products.
C. There are a few examples of oligopoly in South Africa.
D. All monopolistic firms always earn economic profit.
E. Firms operating under conditions of imperfect
competition face horizontal demand curves for their
products.
A firm finds that by producing and selling the last unit of its product,
the marginal revenue it earns is R15 and the marginal cost it incurs is
R14. In order to maximise profits, the firm should:
A. decrease its output if it is a perfectly competitive firm, but not
necessarily if it is a monopolistic firm.
B. decrease its output if it is a monopolistic firm, but not necessarily if
it is a perfectly competitive firm.
C. increase its output irrespective of the type of firm it is.
D. decrease its output irrespective of the type of firm it is.
E. decrease its output if it is a perfectly competitive firm, but increase
its output if it is a monopolistic firm.
Which of the following is a likely example of
monopolistic competition?
A.Eskom
B.Telkom
C.The wheat market
D.De Beers
E. Grocery stores
Product differentiation occurs when:
A. a completely new process is used to produce a familiar
product.
B. different prices are charged for the same good in
different markets.
C. buyers perceive differences in the products of several
companies.
D. products are homogenous.
E. a firm produces many different goods.
The international gold market is best classified
as a:
A.perfectly competitive market.
B.monopolistic market.
C.monopolistically competitive market.
D.oligopolistic market.
The banking industry in South Africa is best
classified as a:
A.perfectly competitive industry.
B.monopoly.
C.monopolistically competitive industry.
D.oligopoly.
The clothing industry in South Africa is best
classified as a:
A.perfectly competitive industry.
B.monopoly.
C.monopolistically competitive industry.
D.oligopoly.
The only bottle store in a remote rural area is an
example of a:
A.perfectly competitive firm.
B.monopolistic firm.
C.oligopolistic firm.
D.monopolistically competitive firm.
Which one of the following is not a potential
barrier to entry?
A.Patent rights
B.Licences
C.Low capital costs
D.Limited size of the market
E. Import restrictions