1 Part 4 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Revenue, Average Revenue, Marginal Revenue Revenue, Average Revenue, Marginal Revenue Competitive Market Competitive Market Perfectly and Imperfectly Competitive Markets Perfectly and Imperfectly Competitive Markets Perfectly Competitive Market Perfectly Competitive Market Characteristics Characteristics Profit, Break-even Price, Loss Profit, Break-even Price, Loss Supply Curve in Short-run Period Supply Curve in Short-run Period Long-run Equilibrium Long-run Equilibrium

2 Revenue ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Revenue Revenue generally depends on the price of the good and the quantity sold TR = P.Q Total revenue Price of a good Sold quantity

3 Revenue ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Average Revenue Average revenue is a revenue per unit of output Marginal Revenue Marginal revenue is the additional revenue from producing (and selling) one more unit of output

4 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics of Perfectly Competitive Markets 1. Price taking 2. Product homogeneity 3. Free entry and exit

5 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Price taking The individual firm sells a very small share of the total market output and, therefore, cannot influence market price The individual consumer buys too small share of industry output to have any impact on market price

6 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Product homogeneity The products of all firms are perfect substitutes Free entry end exit Buyers can easily switch from one supplier to another Suppliers can easily enter or exit a market – there are no barriers for entering or exiting the market

7 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Revenue - perfectly competitive market The price is fixed (given) TR = P.Q TR is a linear function of Q

8 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Revenue - perfectly competitive market - example P = 5 TR = 5Q

9 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics of Imperfectly Competitive Markets 1. Price making 2. Product homogeneity or heterogeneity 3. Entry barriers

10 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Price making The firm is large enough (has a significant market power) to adjust the prices The individual consumer still buys too small share of industry output to have any impact on market price (The opposite is a monopsony but we neglect this here )

11 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Product homogeneity or heterogeneity 2 extremes: - the products of all firms are perfect substitutes - no substitute exists Entry barriers There are significant entry barriers like high entry cost, license etc.

12 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Revenue - imperfectly competitive market The firm is able to change the price The price is changing with demanded quantity

13 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Revenue - imperfectly competitive market - example

14 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Demand - perfectly competitive market P Perfectly elastic demand

15 Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Demand - imperfectly competitive market

16 Profit ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Profit Profit of the firm is a difference between total revenue and total cost maximize

17 Perfectly Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run Profit-maximizing firm will produce at the level of output Q 0

18 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run – economic profit Profit per unit of output π Perfectly Competitive Market

19 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run – break-even price Perfectly Competitive Market

20 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run – economic loss STAY SHUT DOWN Perfectly Competitive Market

21 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run – loss of fixed cost Fixed cost Perfectly Competitive Market

22 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run – loss greater than fixed cost Perfectly Competitive Market Fixed cost

23 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short run – supply curve Perfectly Competitive Market

24 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Long run Perfectly Competitive Market Profitable market Entry of new firms S 0  S 1 Q 0  Q 1 P 0  P 1 π =0π =0π =0π =0

25 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Long run equilibrium Perfectly Competitive Market P = LMC P = min LAC