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Econ 206(A) Tutorial 6 Market Structure and Competition.

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1 Econ 206(A) Tutorial 6 Market Structure and Competition

2 Perfect Competition - Assumptions 1.Many Producers/Sellers 2.No Barriers to Entry/Free Entry and Exit 3.Homogenous Products 4.Many Consumers 5.(also Perfect Knowledge and Homothetic Demand)

3 Short-Run Perfectly Competitive Equilibrium Price p Quantity, q 0 AC D = AR = MR p* MC MR = MC q* costs Abnormal Profit = TR – TC

4 Long-Run Perfectly Competitive Equilibrium Price p Quantity, q 0 LRAC D 1 = AR = MR p* MC MR = MC q1 p1p1p1p1 D 0 = AR = MR Normal Profit

5 Seminar Topic 1 1.Is Competition good for firms? Is it good for consumers?

6 Seminar Topic 2 In what ways do markets characterised by perfect and imperfect competition differ?

7 Imperfect Competition Relax assumption that products are homogenous. Firms have some ability to change price (market power). Less is sold at a higher price. Production is not at the lowest point of AC curve (i.e. not least cost production).

8 Short-Run Imperfectly Competitive Equilibrium Price, p Quantity, q 0 MC D= AR MR AC costs p*p*p*p* q*q*q*q* Abnormal Profit

9 Long-Run Imperfectly Competitive Equilibrium Price, p Quantity, q 0 D= AR MR LRAC p1 q1q1q1q1 Normal Profit E MC

10 Seminar Topic 3 How realistic is perfect competition?

11 Econ 206(A) Tutorial 7 Monopoly and Oligopoly

12 Relaxing Other Assumptions of Perfect Competition Focus on two related assumption: 1.Small number of producers (or only one) 2.Barriers to entry – include technology (patents), high fixed costs (setup costs), economies of scale.

13 How can firms limit entry of other firms? 1.Scale Economies 2.Legal Protection 3.Strategic Control 4.Strategic Behaviour (for instance price cutting)

14 Monopoly & Oligopoly Pure definition = only 1 producer. Legal definition = firm with more than 25% share of the market. When there is only 1 firm, the firms and the industry demand curve are the same. Oligopoly where there are only a small number of large firms. These firms demand curves depend on each others production choices (so there is potential for collusion and cartels).

15 Questions How is a natural monopoly different to other types of monopolies? Why might we want to regulate monopolies?

16 Seminar Topics – Next Week 1.Is the market always the most efficient solutions to the problem of resource allocation? 2.What is meant by social opportunity cost? Provide examples. 3.Should students contribute to the cost of their university education?


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