PURE COMPETITION INDUSTRY

Sharia Economics Department

Faculty of Economics and Business
Airlangga University
Firm and Industry
Firm: a business unit that produces and sells a
certain type of goods.
Industry: a number of competing firms. Their
products replace each other, whether by perfect
replacement or not.

Firm = seller = producer

Industry = market
 Industry Classification
Product
# Homogeneous Differentiated
firm

pure competition monopolistic competition

Many
(competition)
(Oligopoly)
Little
-
(Monopoly) (monopoly)
One

-
(perfect competition) (imperfect competition)
Characteristics of a Pure
Competition Industry
1. Many producers (and many buyers)
2. Homogeneous product
3. Free entry, free exit  no barrier

4. Perfect information.

No consumer preference
Example!
 Industry and Firms
in Pure Competition

Industry Firms
Rp

S
Price

P P D

0 0
Q

output output
In a purely competitive industry, the firm must sell its merchandise at a constant price P,
regardless of the amount of output it sells.
 Total Revenue
Total revenue (TR) is the amount of revenue producers
receive from selling a certain amount of output.

TR = PQ TR
Since the price is constant
(say a), then

TR = aQ TR

which is a linear function.

Therefore, the function TR
takes the form of a
straight line starting from 0 Q
the zero point.
Total Revenue
Example
P Q TR TR
1200 0 0 40000 -
TR
1200 4 4800 35000 -
1200 8 9600 30000 -
25000 -
1200 12 14400
20000 -
1200 16 19200
15000 -
1200 20 24000 10000 -
1200 24 28800 5000 -
1200 28 33600 0 Q
4 8 12 16 20 24 28 32
1200 32 38400
 Average Revenue
shows the amount of average revenue, namely TR
per unit of output.

Therefore: TR
AR 
Q

even though TR = P x Q
TR
P
Q

Therefore, P = AR
 Average Revenue Curve
The D (demand) curve is also called the AR (average revenue) curve.

Rp

P D

Rp

0 Q

P AR

0 Q
 Marginal Revenue (1)
Marginal revenue (MR) is the additional total
revenue due to an increase in sales of one unit of
output.

TR (Rp)
TR
Calculate MR
19200
TR
MR 
Q
14400
19200  14400
MR 
16  12
0 Q
12 16 MR  1200
 Marginal Revenue (2)
Example
P = AR Q TR MR MR
1200 0 0 XXX
1200 4 4800 1200
1200 8 9600 1200
1200 - MR
1200 12 14400 1200
1200 16 19200 1200
1200 20 24000 1200 0 Q
4 8 12 16 20 24 28 32
1200 24 28800 1200
1200 28 33600
In a purely
1200
competitive
1200 32 38400 1200
industry, AR = MR!!
 Marginal Revenue Curve

Rp
Look

P AR

Rp

0 Q

P AR = MR

0 Q
Total Profit

TC 0 < Q < 0A  TC > TR  (loss)

TR
TR and TC

Q = 0A  TC = TR  zero profit

0A < Q < 0B  TC < TR  supernormal

profit or abnormal profit

0 Q Q = 0B  TC = TR  zero profit
A B
Q > 0B  TC > TR  (loss)
 FIRM BALANCE
Maximum profit is obtained when
TR and TC are farthest apart from
each other.
TC
TR It happens when the two curves are
TR dan TC

F
parallel. That is, when the tangent
D to the TC curve is parallel to the TR
G curve.
E
It occurs at point E, at the 0M
output level. It is at this level of
output that the firm reaches the
0 Q equilibrium of the firm.
M

At that 0M output level, TR = Rp MF (= Rp OD),

dan
TC = Rp ME (= Rp OG).
So, the total profit  = TR – TC
= Rp EF (= Rp GD).
The profit level is called the total maximum supernormal profit, and the OM
output level is called the most profitable output or the profit maximizing output.
 Average Profit
AR and AC (Rp)

0 < Q < 0A  AC > AR  (loss)

Q = 0A  AC = AR  Zero Profit

AC 0A < Q < 0B  AC < AR  (supernormal

profit) or (abnormal profit)
P AR = MR

Q = 0B  AC = AR Zero Profit

0 Q Q > 0B  AC > AR  (loss)

A B

Contd ... 
 Average Profit (A)
Maximum profit is reached when
MR = MC at point L (not K).
TR dan TC (Rp)

MC Point L is called the firm balance

AC point (equilibrium of the firm).
P K L AR = MR

The achievement of the

maximum profit occurs at the
0 Q output level of 0M .
A M B

The output level of 0M is called the most profitable output or profit

maximizing output.

Dilanjutkan ... 
 Laba Rata-rata (A)
Aπ = AR – AC
Pada tingkat output 0M itu,
AR = Rp 0P (= ML)
TR dan TC (Rp)

AC = Rp 0E (= MD).
 laba rata-rata (average profit atau
MC A) = Rp EP (atau Rp DL).
AC
P L AR = MR Laba total (total profit atau )
E adalah
T D
1.A x Q = Rp EP x 0M = Rp EPLD.
2.TR – TC = Rp 0PLM – Rp 0EDM
0 Q = Rp EPLD.
A N M B

Lengkapnya, segiempat EPLD itu disebut total maximum supernormal profit.

Firm mencapai efisiensi tertinggi ketika AC minimum pada tingkat output N.

Tingkat output sebesar 0N itu disebut the optimum rate of output, sedangkan
titik terendah AC, yakni titik T, disebut maximum efficiency scale (MES).
 Example
Q P TR TC AC MR MC A 
10 100 1000 925 92,5 7,5 75
15 100 1500 1250 83,3 100 65 16,7 250
20 100 2000 1650 82,5 100 80 17,5 350
25 100 2500 2150 86,0 100 100 14,0 350
30 100 3000 2750 91,7 100 120 8,3 250
35 100 3500 3425 97,8 100 135 2,2 75

MR = TR/Q

MC = TC/Q
A = P - AC
 = TR - TC
or contd ... 
 = Q(A)
 Example (contd)
Q P TR TC AC MR MC A 
10 100 1000 925 92,5 7,5 75
15 100 1500 1250 83,3 100 55 16,7 250
20 100 2000 1650 82,5 100 80 17,5 350
25 100 2500 2150 86,0 100 100 14,0 350
30 100 3000 2750 91,7 100 120 8,3 250
35 100 3500 3425 97,8 100 135 2,2 75

1. A and curves are inverted U-shaped.

2. The optimum rate of output or optimum output is 20 units.
3. Profit maximizing output is 25 units.
4. Profit maximization only happens when  at highest point and not at A.
ISLAMIC MICRO
ECONOMY
MONOPOLISTIC COMPETITION

Sharia Economics Department

faculty of Economics and Business
Airlangga University
 ASSUMPTION
Monopolistic competition
1.differentiated products

2.many sellers

Each producer has a certain monopoly power.

What is an example?
 Monopoly Power

Unloyal buyers

Loyal
buyers

For loyal buyers, the firm has monopoly power, while regarding
unloyal buyers, firms must compete with other firms.

Downward sloping to the right demand curve.

That's where the term monopolistic competition comes from.
 Demand Curve

The more similar a product is

Rp
to competitors' products; the
less loyal buyers are.

The weaker the monopoly

D3
power.
D2
D1

0 Q The steeper the demand

curve.
 Demand Curve

Rp

‟ •
‟
D = AR

0 Q

MR
 Total Revenue
Since the demand curve is
TR downward sloping
P = a – bQ

TR = P x Q
TR = aQ –bQ2
TR = aQ –bQ2

The TR curve is in the shape

0 Q of an inverted U.
Q = a / 2b which we know well.
 Total Profit
TC
Q < 0A  TR < TC  (loss)
TR and TC

Q = 0A  TR = TC  Zero Profit

0A < Q < 0B  TR > TC 

TR (supernormal profit)
(abnormal profit)

0 Q
A B Q = 0B  TR = TC  Zero
Profit
Q > 0B  TR < TC  (loss)
 Total Profit
TC
Maximum profit is achieved at
F
D the 0M output level, when the
TR dan TC

TR and TC curves are parallel

(at points F and G).
E
G
TR
At that 0M output level,
TR = Rp 0D (= Rp MF), and
TC = Rp 0E (= Rp
0 MG).maximum (supernormal)
Q The
M
profit is Rp ED (= Rp GF)
 Average Profit
Rp
Firm equilibrium occurs at point E,
TC ie at time MR = MC, at an output level of 0M
F units.
0M adalah the most profitable output
G atau profit maximizing output.
TR At that 0M output level,
AR = P =Rp 0R (= Rp MS)
0 MK Q
AC = Rp 0N (= Rp MD)
Rp (average profit or A)
AAR – AC
MC
= Rp NR (= Rp DS)
S
AC (total profit or )
R
1.  = A x Q = RN x 0M
D
N = Rp RNSD
E AR 2.  = TR – TC = 0RSM – 0NDM
0 Q = Rp RSND.
MK
MR In other words, Rp GF = Rp RSND.