Theory of the Firm

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  • Topic: Economics, Monopoly, Perfect competition
  • Pages : 14 (1530 words )
  • Download(s) : 30
  • Published : October 30, 2012
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05/08/2012

Last topic: THEORY OF THE FIRM

Topic 5
Market Structures (I)

Nature of the firm Theory of production Fixed v/s Variable factors Time periods Product concepts – TR, AR, and MR Product curves & Economic intuition Theory of costs – Short Run TC, FC and VC (AFC, AVC and SAC) SAC and SMC Cost curves & Economic intuition Relationship between product and cost curves Theory of costs – Long Run TC LAC and LMC Cost curves & Economic intuition Economies and Diseconomies of scale

Theory of Supply Profit maximization Accountant v/s economist Profit concepts Revenue Concepts – TR, AR, MR Profit max by TR and TC Profit max by MR and MC MR and MC graphical analysis Firm’s LR output decision Firm’s SR output decision Isocost and Isoquants (LR) Isoquants – features, MRTS Isocost – definition, slope, changes Cost minimization and producer equilibrium

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This topic
• Market Structures • Perfect Competition • Monopoly

6a: PERFECT COMPETITION
 Defining features of mkt structure  Recap of costs  Features – many firms, identical product, perfect and complete info, free entry and exit in LR  Demand and Revenue 3

 Industry v/s firm  Profit max conditions  Should firm produce at all?  Firm’s equilibrium in SR  Diagrams – marginal, total  Firm’s equilibrium in LR 4

Industry v/s Firm
• Industry  set of all firms making the same products • Output of industry  sum of outputs of its firms • Firm  1 unit!

Perfect Competition

MARKET STRUCTURES

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ECON1194/Topic 5 - Market Structures (I)

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Market Structures
Market structure  features that affect behaviour and performance of firms in an industry 4 defining characteristics: ◦ The size and number of buyers and sellers/firms in the industry ◦ The nature of the product – identical or differentiated ◦ Information structure (buyers – price and quantity and sellers – technology and input costs) ◦ Entry or Exit condition (barriers?) 7 Perfect Competition

Market Structure
Pure Monopoly

Monopolistic Competition

Oligopoly

Duopoly Monopoly

The further right on the scale, the greater the degree of monopoly power exercised by the firm.

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Summary of features
Type of market Number of firms Nature of product Information Structure Entry/ Exit condition Implications for demand curve faced by firm

FEATURES OF PC
Horizontal: firm is a price taker

Perfect competition

Large number of small firms Many / several

Homogeneous (undifferentiated)

Complete and Perfect info

Free entry and exit

1. Many firms, each very small relative to industry
– Actions cannot affect price (no mkt power) – Market price determined by dd and ss – All firms are price takers – Only decision variable  how much to produce

Monopolistic competition

Differentiated

Complete and Perfect info

Relatively Free entry and exit

Downward sloping, but relatively elastic

Oligopoly

Few

Undifferentiated or differentiated

Incomplete info on part of sellers

Possible entry subject to overcoming barriers Barriers to entry (Restricted entry)

Downward sloping. (shape depends on reactions of rivals)

Monopoly

One (pure mono)

Unique

Complete and Perfect info

Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

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Why would a competitive firm be a price taker?
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The Demand Curve for a Competitive Industry and for One Firm

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• answer: it has no choice • competitive firm faces a demand curve that is horizontal/perfectly elastic at the market price

4 Price [£]

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1 Dmarket 100 200 300 400

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Quantity [millions of tons] Competitive industry’s demand curve 11 5 August 2012

Quantity [thousands of tons] firm’s demand curve  perfectly elastic 12

ECON1194/Topic 5 - Market Structures (I)

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FEATURES OF PC
2. Nature...
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