PERFECT COMPETITION

AND MONOPOLY
Presented by: Abegaille Mangilit
4 MARKET TYPES
1. Perfect Competition (no market power)
• Large number of relatively small buyers and sellers
• Standardized product
• Very easy market entry and exit
• Non-price competition not possible
.
2. Monopoly (absolute market power subject to government regulation)
• One firm, firm is the industry
• Unique product or no close substitutes
• Market entry and exit difficult or legally impossible
• Non-price competition not necessary
3. Monopolistic Competition (market power based in product differentiation)
• Large number of relatively small firms acting independently
• Differentiated product
• Market entry and exit relatively easy
• Non-price competition very important

4. Oligopoly (market power based on product differentiation and/or the firm's dominance
.

of the market)
• Small number of relatively large firms that are mutually independent
• Differentiated or standardized product
• Market entry and exit difficult
• Non-price competition very important among firms selling differentiated products
MARKET TERMINOLOGIES
Perfect competition- many sellers offering the same product that an individual
firm has freshly no control over the price of its product.
Market structure- the interaction of supply and demand decides the price for all
participants .

Price taker- a firm in this market has no market power and acts only
Price maker- it has the power to establish the price at whatever level at once
subject to possible contrains such as government regulation
MARKET TERMINOLOGIES

Pricing for profit: The method of pricing that follows the MR = MC rule.
Pricing for revenue: The pricing of a product to maximize a firm's revenue.
Shutdown point: The point at which the. firm must consider ceasing its production
activity because the short-run loss suffered by operating would be equal to the
short-run loss suffered by not operating (i.e., the operating loss = total fixed cost).
MARKET TERMINOLOGIES

Contribution margin: The amount of revenue that a firm earns above its total
variable cost.

Economic cost: All cost incurred to attract resources into a company's employ.
Such cost includes explicit cost usually recognized on accounting records as well
as opportunity cost.
MARKET TERMINOLOGIES

Economic loss: A situation that exists when a firm's revenues cannot cover its
accounting cost as well as its opportunity cost of production.
Economic profit: Total revenue minus .total economic cost. An amount of profit
earned in a particular endeavor above the amount of profit that the firm could be
earning in its next-best alternative activity. Also referred to as abnormal profit or
above-normal profit.
MARKET TERMINOLOGIES

Long run (market analysis): Firms are expected to enter a market in which sellers
are earning economic profit. They are expected to leave a market in which sellers
are incurring economic losses. .

Normal profit: An amount of profit earned in a particular endeavor that is just

equal to the profit that could be earned in a firm's next-best alternative activity.
 COMPETITION AND
MARKET TYPES IN
ECONOMIC ANALYSIS
Presented by: Abegaille Mangilit
THE MEANING OF COMPETITION
The most important indicator of the degree of competition is the ability of firms to
control the price and use it as a competitive weapon.

The extreme form of competition is. called perfect competition that the
compensation is so intense and the firm's are so evenly divided that no one seller or
group seller has no control over the , they are all price takers.
THE MEANING OF COMPETITION
The second key measure of competition is the ability of an “above normal” or
“economic” profit in the long run.

Market entry and exit most directly affects

.
the ability of a firm to earningeconomic
profit in the long run.
.
MARKET TYPES AND COMPETITION IN THEORY IN REALITY

As this case with all the theoretical constructs the relationship between least
four distinct market types and actual market
.
conditions may vary gets fit very
well into this market types still other may evolve one firm from one type to
another.
PRICING AND OUTPUT DECISION IN PERFECT COMPETITION

THE BASIC BUSINESS DECISION

At this point it no longer would make sense for a profit-maximizing firm to
produce and to emphasize that there . is indeed a limit as to how much a
perfectly competitive firm should produce in a short run it is up to the firm to
determine what this limit is.
KEY ASSUMPTIONS OF PERFECTLY COMPETITIVE MARKET
• The firm operates in a perfectly competitive market and therefore is a price
taker
• The firm makes the distinction between the short-run and long run
• The firm's objectives is to maximize. its profit in the short run. If it cannot
earn a profit, then it seeks to minimize its loss.
• The firm includes its opportunity cost of operating in a particular market as
part of its total cost of production.
 P= MC rule

A variation of the MR MC rule for those firms operating in perfectly

competitive markets. In such markets, firms are price takers. Thus, the price
.
they must deal with (which has been determined by the forces of supply and
demand) is in fact the same as a firm's marginal revenue.
MARGINAL REVENUE=MARGINAL COST APPROACH TO
FINDING THE OPTIMAL OUTPUT LEVEL

Affirm that want to maximize the profit (or minimize its loss) should produce
a level of output at which through the additional revenue received from the
.

last unit is equal to the additional cost of a producing unit.

PRICING AND OUTPUT
DECISIONS IN
MONOPOLY MARKETS
Presented by: Glen Jonas De LOs Trinos
 OVERVIEW

The key point is that a monopoly firm's ability to set its price is limited by
the demand curve for its product and in particular, the price elasticity of
demand for its product (Recall that according to the law of demand, people will
buy more as price falls and vice versa.)
 FIGURE 9.9
Demand, MR, and MC
curves for monopoly
 OVERVIEW

Notice that if the firm charges too high a price (eg. P), its marginal revenue will
exceed its marginal cost; hence, it will be forgoing some amount of marginal profit
(shown by the lighter shade). If the firm sets its price at too low a level, its marginal
cost will exceed its marginal revenue, and the firm will experience a marginal loss
(shown by the darker shade).
 OVERVIEW

The ability of a monopoly to set its price is further limited by the possibility of rising
marginal costs of production. If this is the case, then surely at some point the
increasing cost of producing additional units of output will exceed the decreasing
marginal revenue received from the sale of additional units. This begins at Q shown
in Figure 9.10.
 FIGURE 9.10
INCREASING
MARGINAL COSTS
IN RELATION TO
DECREASING
MARGINAL
REVENUE
 OVERVIEW

In conclusion, the firm that exercises a monopoly power over its price should not set
its price at the highest possible level. Instead, it should set it at the right level. And
what is this "right" level? It is the level that results in MR=MC
 OVERVIEW

To see how the MR = MC rule applies to the monopolist as well as to the perfect
competitor, see Table 9.8. Note that the table presents only the cost data relevant to
this example.
 TABLE 9.8
USING MARGINAL REVENUE AND MARGINAL COST TO
DETERMINE OPTIMAL PRICE AND OUTPUT: THE CASE OF
MONOPOLY
 Figure 9.11
Graphical
Depiction of
MR= MC Rule for
a Monopoly
 THE IMPLICATIONS OF
PERFECT COMPETITION
AND MONOPOLY FOR
MANAGERIAL DECISION
MAKING
IMPORTANT LESSON THAT MANAGERS CAN LEARN BY STUDYING
THE PERFECTLY COMPETITIVE MARKET
• Making money in highly competitive markets is extremely difficult due to
price control limitations.
• Cost efficiency is crucial for survival in perfect competition.
• Early market entry, even before high demand, can be advantageous.
• Identifying market opportunities and taking calculated risks are essential
managerial tasks.
IMPORTANT LESSON THAT MANAGERS CAN LEARN BY STUDYING
THE PERFECTLY COMPETITIVE MARKET
Of course, the demand may never materialize or the long-run increase in supply
might be so great that no one makes any money in this market. But that is all
part of the risk that a manager must sometimes take. We will see more of the
making of pricing and output decisions in highly competitive markets in the
next chapter when we examine the case of monopolistic competition
IN MONOPOLY MARKETS NOT SANCTIONED BY THE GOVERNMENT
VIA REGULATIONS OR PATENT LAWS, A MONOPOLY PRESENTS A
MANAGER WITH SOMEWHAT OF A PARADOX.

What happens if the managers of a firm are so successful in beating the

competition that the firm in fact becomes a monopoly, or at least one that
exercises monopolistic power?
IBM (International Business Machines Corporation)

is an American multinational technology and consulting company. which so

dominated the mainframe computer market in the 1960s that in 1969 the
Department of Justice instigated an anti-trust (body of laws and regulations
designed to promote fair competition in the marketplace ) against it to reduce its
market power. The suit was eventually dropped in 1982.
 INTERNATIONAL APPLICATION:
PERFECT COMPETITION MEANS
MORE THAN JUST THE SHIFTING OF
SUPPLY AND DEMAND DIAGRAMS
INTERNATIONAL APPLICATION: PERFECT COMPETITION MEANS
MORE THAN JUST THE SHIFTING OF SUPPLY AND DEMAND
DIAGRAMS
When we talk about "perfect competition" in economics, it's not just about
moving supply and demand curves. Perfect competition is a specific type of
market where many sellers offer identical products, and buyers can easily switch
from one seller to another.
Every morning at dawn, through the winter and spring, the cutters of Cordoba come to the sugar
cane fields. They labor with their machetes, each one cutting more than a ton of cane before dusk,
taking home $7 for a back- breaking day's work, the same as last year and the year before, with
little hope that life will offer more. Their work creates a product that has almost no value: it costs
about as much to buy a ton of raw cane in Mexico as it does to buy a ton of refined sugar on the
world market. If that makes little economic sense, consider the big picture of Mexico's sugar
industry. It is as bitter as the raw smell wafting from the sugar mills. The [sugar) mills are antiques,
better suited to the 19th century than the 21st. Yet they produce far more sugar than anyone wants
to buy, including the nation's most important customer, the United States. The glut has left
Mexico's sugar industry all but bankrupt.
Mexico has a problem because its sugar industry is producing too much sugar that it can't sell for a
good price, and this is causing financial difficulties for the industry and the people who work in it.
The passage discusses the complex situation in Mexico's sugar industry and the actions of
President Vicente Fox to address it. Keypoints of the situation as international application

1. Market Conditions: In a perfectly competitive market, firms that can't make a profit at the
existing market price will leave the industry. This often results in job losses for workers in those
firms.

2. Dilemma for President Fox: President Fox faced a difficult decision because many sugar
plantation workers in Mexico depend on this industry for their livelihood. If it were to collapse, it
could lead to significant unemployment and hardship.
3. Government Intervention: To prevent massive job losses, President Fox decided to expropriate
(take control of) half of the nation's sugar mills. This transformed many firms from operating in a
perfectly competitive market to a kind of government-owned monopoly. In other words, the
government took control of a significant part of the industry.

4. Trade Disputes: The situation is made more complicated by disputes with the United States.
Mexican sugar growers believe that the U.S. is flooding the Mexican market with cheaper corn
syrup while also limiting Mexican sugar imports into the U.S.
5. Long-Term Outlook: Many experts believe that, in the long run, some sugar producers,
especially smaller ones, would have gone out of business anyway. Also, many young workers in
the sugar industry are seeking jobs in other sectors.

6. Social Impact: President Fox's actions, while not a perfect solution, are seen as a way to avoid a
sudden and severe social problem caused by the sudden loss of many jobs. It prevents many people
from being left without income or job prospects.
THE USE OF CALCULUS
IN PRICING
AND OUTPUT DECISIONS
PRESENTED BY: IVY JEAN L. AUSTRIA
 Perfect Competition
Perfect competition is an ideal type of market structure where all producers and consumers have full and
symmetric information and no transaction costs.

Suppose that you are the owner and operator of a perfectly competitive firm with the following total functions:
TC = 2,000 + 10Q + 0.02Q² (9A.1)
Suppose further that the current market price is $25. By definition, TR P × Q, so your total revenue function can
be stated as:
TR = 25Q (9A.2)
Profit (π) is defined as TR – TC. Therefore, using Equations (9A.1) and (9A.2), your firm’s profit function can be
expressed as:
π = 25 Q – (2,000 + 10Q + 0.02Q²) (9A.3)
= 25 Q – 2000 – 10 Q – 0.02 Q²
= – 2000 + 15Q – 0.02 Q²
The optimal output level (Q*) can be found at the point where your firm’s marginal profit is
equal to zero. In other words, additional units of output should be produced as long as your firm
earns additional profit from their sale.
(9A.4)
Setting Equation (9A.4) equal to zero and solving for the optimal level of output (Q*),
15 – 0.04Q = 0 (9A.5)
Q* = 375

Returning to the total profit function presented in Equation (9A.3) and substituting Q*for Q
results in the following profit:
π = 2000 + 15(375) 0.02 (375)² (9A.6)
= $812.50
 An alternative way of finding P* and Q* is to set the firms marginal revenue function equal to its
marginal cost function and then solve for Q*. We already know that MR = P. The marginal cost
function is the first derivative of the total cost function:

Setting MR equal to Equation (9A.7) and solving Q* gives us

25 = 10 + 0.04 Q (9A.8)
15 = 0.04 Q
Q* = 375
 Monopoly
Monopoly it refers to a firm which has a product without any substitute in the market.

As the manager of a product that only your company sells (e.g., a patent-protected product), suppose you are
given the following information:
TC = 10,000 + 100 Q = 0.02 Q2 (9A.9)
QD = 20,000 – 100P (9A.10)

First, determine your marginal revenue function. Because you are a price setter and not a price taker, you
cannot assume that MR = P Instead, you must derive the marginal revenue function you’re your firm’s demand
function, shown in Equation (9A.10). Because your objective is to find the level of output that will maximize
your profit (i.e., Q*), you must rearrange the terms in the equation so that price depends on the level of output.
P = 200 – 0.01Q (9A.11)
By definition, TR = P × Q. So by substitution,
TR = (200 – 0.01Q)Q (9A.12)
= 200Q – 0.01Q²

The marginal revenue function is the first derivative of the total revenue function:

From the example of perfect competition, we know that the first derivative of the total cost
function is the marginal cost function:
Thus, the MR = MC rule is adhered to by setting Equation (9A.13) equal to Equation (9A.14)
and solving for Q*
200 – 0.02Q = 100 + 0.04Q
(9A.15)
0.06 = 100
Q* = 1667 (rounded to the nearest number)

To find P we return to Equation (9A.11) and substitute Q* for Q.

P = 200 – 0.01 (1,667)
(9A.16)
P* =$183.33, or $183
At the rounded price of $183, your firm can expect to sell 1,667 units of output per time
period and earn an economic profit of $73,333 (rounded to the nearest dollar). From the
example on perfect competition, you should be aware of how the profit figure was determined.
 BREAK-EVEN ANALYSIS
(VOLUME-COST-PROFIT)
Also called volume-cost-profit analysis, a simplification of the economic analysis of
the firm that measures the effect of a change in quantity of a product on the profits
of the firm.
The following are the important elements that go into this analysis:

1.It retains the distinction between fixed and variable costs.

2.Typically, it uses a straight-line total revenue curve. Thus, it implicitly assumes

the existence of perfect competition since the price is considered to be the same
regardless of quantity.

3.Break-even analysis employs a straight-line total variable cost curve.

The very simple equation for profit is:

To obtain the break-even point, total revenue is set equal to total cost:

Thus, the break-even quantity is

Q = TFC/(P – AVC )
This table shows that if the quantity produced is larger than 10,000 units, a profit
will result. If quantity drops below 10,000, the company will incur loss.
 Break-even point
The level of output at which the firm realizes no profit and no loss.

Break-even revenue
The amount of revenue at which the firm realizes no profit and no loss.
Degree of Operating Leverage (DOL)
An elasticity-like formula that measures the percentage change in profit resulting
from a percentage change in quantity produced or revenue.
 Required Profit
Profit that can represent the opportunity cost or the normal profit and that can be
incorporated in the break-even formula. A fixed dollar amount of required profit
can be handled as an addition to fixed cost; a specific profit per unit of product can
be added to the average variable cost.
 Total fixed cost (TFC)
A cost that remains constant as the level of output varies. In a short-run analysis,
fixed cost is incurred even if the firm produces no output. Also referred to simply as
fixed cost.

Total variable cost (TVC)

The total cost associated with the level of output. This can also be considered the
total cost to a firm of using its variable inputs. Also referred to simply as variable
cost.
 THE USES AND LIMITATIONS 0F VOLUME-COST-PROFIT
ANALYSIS

Volume-cost-profit analysis is a very useful tool under certain circumstances, but its
limitations must be understood. When a corporation prepares its financial plan for
the next year or even the next two years, it usually engages in what is referred to as
"bottom-up" planning, a process that is not only time consuming but extremely
detailed. Many parts of the corporate organization contribute data on sales
forecasts, prices, manufacturing costs, administrative and marketing expenses, and
other measures. Data may be generated from every department in the corporation.
 Consolidating these data and making various changes in them before
bringing a final plan up to top management for approval is a mammoth
undertaking. A corporation would not use volume-cost-profit analysis for this type
of planning.
The main use of this analysis lies in calculating alternative cases in a
restricted period of time. It can also be used to make small, relatively quick
corrections. In addition, during early stages of the plan, when detailed data are not
yet available, estimates using variable and fixed costs can be used to establish some
rough benchmarks for the eventual detailed plan.
 SOME IMPORTANT LIMITATIONS OF BREAK-EVEN
ANALYSIS

1. It assumes the existence of linear relationships, constant prices, and constant

average variable costs. However, when the effects of relatively small changes in
quantity are measured, linear revenues and variable costs are certainly good
approximations of reality.

2. It is assumed that costs (and expenses) are either variable or fixed. The existence
of fixed costs limits this analysis to the short run. Changes in capacity are ordinarily
not considered.
3. For break-even analysis to be used, only a single product must be produced
in a plant or, if there are several products, their mix must remain constant.

4. The analysis does not result in identification of an optimal point; it focuses

on evaluating the effect of changes in quantity on cost and profits.
THANK
YOU!