...Production and Perfect Competition In the first calculation, the total fixed costs = $1,000,000 and the total variable costs equals to $4.4 million, with four million for wages and 50,000 workers multiplied by $80 per worker, plus $400,000 of other variable inputs. The average variable cost equals to $22 million, with total variable costs of $4.4 million divided by 200,000 units. Worker productivity equals to 4, with 200,000 units of output divided by 50,000 workers. The loss is $400,000, with total revenue of 200,000 units of output time’s $25 price, equals to five million minus total cost of $5.4 million. The total cost can be calculated by multiplying the average total cost by 200,000 units of output, or adding the total variable cost to the total fixed costs. For the second calculation, the total fixed cost equals three million. The total variable cost has not changed, still at $4.4 million and the average variable cost will remain at $22. The average total cost equals to $37, since $4.4 total variable costs plus the $3 million of total fixed cost will be divided by 200,000 units of output per day. Worker productivity will stay at four and the loss will be $2.4 million, with total revenue remaining at $5 million and total cost equals $7.4 million. The shutdown rule is that if the firm can cover total variable costs at a certain level of production in the short run, it might keep operating. Fixed costs are not important in the short run because they are sunk...
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...Unit 1 IP Heather Williams | Potatoes | Chickens | Michelle | 200 / 4 | 50 / 1 | James | 80 / 2 | 40 / 1 | 1. What is Michelle’s opportunity cost of producing potatoes? Michelle’s opportunity cost of producing potatoes is 1 pound of potatoes is equivalent to ¼ of a chicken. The opportunity cost would be ¼ of a chicken. 2. What is Michelle’s opportunity cost of producing chickens? Michelle’s opportunity cost of producing chickens is 1 chicken is equivalent to 4 pounds of potatoes. The opportunity cost is 4 pounds of potatoes. 3. What is James’ opportunity cost of producing potatoes? James’ opportunity cost of producing potatoes is 1 pound of potatoes is equivalent to ½ of a chicken. The opportunity cost is ½ of a chicken. 4. What is James’ opportunity cost of producing chickens? James’ opportunity cost of producing chickens is 1 chicken is equivalent to 2 pounds of potatoes. The opportunity cost is 2 pounds of potatoes. 5. Which person has the absolute advantage in which activities? Michelle has the absolute advantage in both activities because she can produce more potatoes and more chickens then James. 6. Which person has the comparative advantage in potatoes? Michelle has the comparative advantage of potatoes 200/50 = 4 pounds of potatoes per 1 chicken, where James is 80/40 = 2 pounds of potatoes per 1 chicken. 7. Which person has the comparative advantage in chicken? James has the comparative advantage in chicken 40/80 = .50 or ½ chicken per 1 pound...
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...the market price of the good it sells. d. hire as many workers as it needs at the prevailing wage rate. ANS: C PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Market power MSC: Definitional 2. A book store that has market power can a. influence the market price for the books it sells. b. minimize costs more efficiently than its competitors. c. reduce its advertising budget more so than its competitors. d. ignore profit-maximizing strategies when setting the price for its books. ANS: A PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Market power MSC: Applicative 3. The analysis of competitive firms sheds light on the decisions that lie behind the a. demand curve. b. supply curve. c. way firms make pricing decisions in the not-for-profit sector of the economy. d. way financial markets set interest rates. ANS: B PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 4. For any competitive market, the supply curve is closely related to the a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms’ costs of production in that market. d. interest rates on government bonds. ANS: C PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 5. Suppose a firm in each of the two markets listed below were to increase its price by 20 percent. In which...
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...Applications Reference Books Sr No R-1 R-2 R-3 Other Reading Sr No OR-1 OR-2 OR-3 OR-4 OR-5 OR-6 OR-7 Journals articles as Compulsary reading (specific articles, complete reference) Kwang Ng,Yew,Why Is a Financial Crisis Important? The Significance of the Relaxation of the Assumption of Perfect Competition,International Journal of Business and Economics,2009,Vol.8,No.2,91-114 , Roman Indrest and Tommasso Valletti,Price Discrimination in input markets,The Rand Journal of Economics,Vol. 40,No.1,Spring 2009,1-19 , Cordtz,Dan,Car wars: A global report on Auto Industry,FInancial World,August 22,1989;158,17;ABI/INFORM Global , S.k.Mishra,A Brief History of Production Functions,The IUP Journal of Managerial Economics,November,2010,Vol. VIII,No. 4,pp.6-34 , Monika Jain,Paradox of Plenty,with Special Reference to Inelastic Demand for Apples,The IUP Journal of Managerial Economics,May,2011,Vol. IX,No. 2,pp.4455 , Cathy Locke Bee Staff Writer. The Sacramento Bee ,"EID report reveals household water use on rise An analysis of supply, demand recommends holding off on meters" http://search.proquest.com/docview/246565304?accountid=80692 , Yeung; Vincent Mok,Regional monopoly and interregional and intraregional competition :The parallel trade in coca cola between shanghai and Hangzhou in China,Economic Geography; Jan 2006; 82, 1; ABI/INFORM Global,pp.89-109 , Title Managerial Economics Author Damodaran, Suma Edition 1st 1st 1st Year 2010 2009 2011 Publisher Name Oxford University Press Cengage Learning...
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...number of buyers and sellers, nature of product being sold, mode of pricing and nature of market information. The structure of any market has a great influence on the behaviour of buyers and sellers in the market and thus affects the performance of firms operating in the market and, as could be expected, the decision making activities of managers of the respective firms in their bid towards achievement of the traditional profit maximization objective of the firm. There are four kinds of market structures that can be identified: Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly. We would examine the market structures and their effects on managerial decision making in turn. Perfect Competition Perfect competition is the idealized version of the market structure with existence of many buyers and sellers with free entry and free exit, homogeneity of the product sold, perfect mobility of resources or factors of production and perfect information among all market players. In this type of market, demand is perfectly elastic and each individual buyer or seller is so small relative to the market size that he or she has no power to influence the price. Each individual can only decide how much to buy or sell at the price determined by the market. The profit maximising output for a firm is where marginal revenue equals marginal cost, and since in...
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...INTRODUCTION……………………………………………………………………...3 CHAPTER I Perfect Competition Market……………………………………………..5 1.1. Perfect Competition Market Characteristics ……..………………….5 1.2. Perfect Competition Supply and Demand…………………………...9 CHAPTER II Perfect Competition Short-Run Supply………………………………..13 2.1. Short-Run Production Alternatives of a Competitive Firm………... .13 2.2. Short-Run Equilibrium and Supply Curve ………………………… 23 CHAPTER III Perfect Competition Long-Run Supply………………………………29 3.1. Long-Run Equilibrium Conditions…………………………………..29 3.2. Long-Run Industry Supply Curve…………………………………...33 3.3. Perfect Competition Market Efficiency……………………………...36 CHAPTER IV Practical analysis……………………………………………………..41 CONCLUSIONS……………………………………………………………………...45 LITERATURE………………………………………………………………………...47 APPENDIX…………………………………………………………………………...49 INTRODUCTION The issue of supply in the perfect competition conditions is a rather complex topic. It comprises of many crucial points that I will try to identify and explain. Some of them will be caused by the perfect competitive conditions’ regulations of the general processes of the supply formation, profit maximization, equilibrium achieving and others, dictated by the characteristics of the perfect competition itself, such as a large number of small firms, identical products sold by all firms, perfect resource mobility or the freedom...
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...affecting the market price of its product. Assumption 4.Each firm must passively accept the existing market price, but it can sell as much as it wants at that price. Assumption5..There is freedom of entry and exit, which means that any new firm is free to enter the industry and start producing if it so wishes, and any existing firm is free to cease production and leave the industry. Marginal cost and marginal revenue in the perfectly competitive market where all firms operate under the same cost conditions, marginal cost is considered as the most important factor after price that affect the supply curve, and firms that cannot adopt the lowest cost methods of manufacturing are hard to maintain in this market. The goal therefore of all firms is to maximize their profits which increases as long as marginal revenue exceeds marginal cost and minimize marginal cost is defined by investopedia as '' The change in total cost that comes from making or producing one additional item” or the change in total cost from the production of one extra unit of output. Therefore, when a new technology is available, the cost in production is saved. Small businesses in this case might not be successful if risks are...
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...CHAPTER 7
THEORY OF FIRMS AND MARKET STRUCTURE I : PERFECT COMPETITION AND MONOPOLY
PREPARED BY : SITI NORDIYANA ISAHAK
THEORY OF FIRM
• FIRM – an organization/ institution that combines all resources for the production of goods and services. • INDUSTRY – a group of firm that produces or sells similar product in the same market. E.g : manufacturing industry such as textile, soaps, foods, servicing industry and so on. • Firm’s objective – maximize profit – attain production efficiency whereby cost is minimized TOTAL PROFIT = TR – TC if TR >TC → Profit (+ve) if TR
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...Perfect Competition Perfect competition is a problem that is emerging in a market in which buyers and sellers are informed about all elements of monopoly that are absent and the market price of a commodity is not control by individual buyers and sellers. Perfect competition is simply looked as a market structure where competition is at its greatest possible level. According to Kirzner (2000), “Perfect competition therefore came to mean the situation in markets where each and every participant lacks any power whatever directly to influence product price or product quality”. Perfect competition is used to compare other and real-life market structures. A real life market structure such as agriculture is the industry that closely resembles a perfect competition. The four key characteristics of perfect competition are a large number of small firms, identical products sold by all firms, perfect resource mobility or the freedom of entry into and exit out of the industry, and perfect knowledge of prices and technology. These four characteristics basically describes that a perfectly competitive firm does not have any control over the market. A large number of small firms that produce identical products have a large number of perfect substitutes that exist for the output produced by any given firm. This means the demand curve for a perfectly competitive firm's output is perfectly elastic. Freedom of entry into and exit out of the industry means that capital and other resources are perfectly...
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...Monopolistic Competition is a market structure in which there are several or many sellers; each produce similar, but slightly differentiated products. Differentiation can be on the basis of colour, design, size, taste, fragrances, etc. Each producer can set its price and quantity without affecting the marketplace as a whole. Wikipedia explains the concept as, “A common market form. Many marketers can be considered monopolistically competitive, often including the markets for restaurants, cereal, clothing, shoe, and service industry in large cities”. “Monopolistic Competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, the firms are left with excess production capacity. This market concept was developed by Chamberlin (USA) and Robinson (Great Britain)” – Investopedia. Chamberlin and Robinson also described this situation as an imperfect competition as the market does not have the conditions required for perfect competition. The characteristics of Monopolistic Competition are stated below: - 1. It has both the elements of Monopoly and Perfect Competition. 2. Large number of buyers and sellers in the market. 3. Non-Price difference (product differentiation) among the competitive products. 4. Few entry as well as exit barriers. 5. All the sellers have relatively small market share. 6. All the firms are profit maximizes. 7. Each firm has a limited ability to affect its output price. 8. The...
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...and sellers in the market. Because of the large numbers of buyers and sellers selling the same product. This market is perfectly competitive. 2) In assignment 1, it was also stated that the market structure competitive and that the equilibrium price was to be determined by setting QD equal to QS. In a perfectly competitive market there are a large number of buyers and sellers. The products sold in this market are perfectly homogeneous. Examples of perfect competition are vegetable market, agricultural market, market for cereals etc. The main characteristics of perfect competition are: a) Large number of buyers and sellers b) Homogeneous product c) No entry barriers d) No transaction cost e) Perfect information A firm under perfect competition cannot affect the market price. They act as mere price takers. They take market price as given and sell any amount of quantity as per its capacity at that price. If a firm increases its price, consumers will then buy the product from another firm. Therefore a perfect competitive firm always sets its price equal to its MC. Suppose in the short run the firm is earning a supernormal profit. As a result, other firms will get attracted and will enter the industry. This will increase the industry output and market price will fall. This process will till the entire supernormal profit is exhausted and each firm ends up earning normal profits only. Therefore price will fall to the minimum point of the Average cost (AC) curve...
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... form, imperfect competition is known as monopoly. The following is going to discuss that monopoly is always against the public interest. To compare with perfect competition (another extreme form), the potential strengths and weaknesses of monopoly will be presented and examine which one can be best to serve the public interest. First of all, a monopoly literally means a sole seller, it occurs when there is only one firm in the whole industry. But in practice, it is difficult to exist. Thus more than 25% market share in the industry is identified as monopoly by its legal definition. Meanwhile monopoly also exists in a certain region, e.g. a local water company dominates the local market as ‘natural monopoly’ which means that market may be too small to support more than one firm to achieve significant economies of scale. A major characteristic of monopoly is high barriers to entry. For example, a specific legal barrier protects monopoly in term of patent on essential processes, copyright and licenses and so on. At the same time, monopoly protects itself from competing through a variety of ways such as achieving great economies of scale, merger and takeover other companies and aggressive tactics etc. In case like this, the monopoly strongly erects the barriers to stop other rivals from entering or drive existing rivals out of the business. Furthermore some industries are considered to be unsuitable for competition, e.g. gas, electricity...
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...Macroeconomics Final Paper Perfect Competition is a market structure of a commodity or service that has a fixed price. This market structure is designed to minimize loss and maximize revenue with a fixed cost. This fixed price may rise or fall however, no one firm or company that decides to enter this market has to be willing to accept whatever this price may be. A firm will not succeed in an attempt to make a profit by initially lower its price to out sell its competition. This strategy will not work in a perfect competition market, and the company will fail due to the framework and structure of this market. Perfect Competition price is not affected by the number of firms or companies that sell that same product because it would be a very small percentage of the total number of firms that produce this product globally. The demand or market price in the perfect competition of a market will continue to stay the same. Therefore, this market will not be affected by the actions of one or two firms within the market. The profit or revenue that each firm receives will depend on its total revenue minus its total cost or how much money it will receive from selling a unit of measurement of that commodity minus the total cost it takes to produce that commodity in a unit of measurement. Long run equilibrium is a scale or measure where firms earn just a normal profit and zero economic profit. Market supply and demand will adjust as firms enter or leave the industry or...
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...CHAPTER 11 General Equilibrium and the Efficiency of Perfect Competition Prepared by: Fernando Quijano and Yvonn Quijano General Equilibrium and the Efficiency © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair © 2004 Prentice Hall Business Publishing C H A P T E R 11: Perfect Competition • Input and output markets cannot be considered separately or as if they operated independently. Principles of Economics, 7/e Karl Case, Ray Fair 2 of 33 General Equilibrium and the Efficiency • Partial equilibrium analysisis the process of examining the equilibrium conditions in individual markets and for households and firms separately. • General equilibrium is the condition that exists when all markets in an economy are in simultaneous equilibrium. General Equilibrium and the Efficiency General Equilibrium and the Efficiency of Perfect Competition General Equilibrium and the Efficiency of Perfect Competition • In judging the performance of an economic system, two criteria used are efficiency and equity (fairness). • Efficiency is the condition in which the economy is producing what people want at the least possible cost. of C H A P T E R 11: Perfect Competition © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 3 of 33 © 2004 Prentice Hall Business Publishing C H A P T E R 11: Perfect Competition of Principles of Economics, 7/e Karl Case...
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...of the various factors of production at a minimum cost. Efficiency can be measured in different forms; productive, allocative and X-efficiency. Productive Efficiency In evaluating the productive efficiency of a market, we are looking at the minimum cost derived as a result of producing or supplying a good. In the short term, efficiency is achieved when a unit of output is attained at the very base of the average cost curve as shown in Fig 1a below. FIG 1a Cost FIG 1b Cost Economic Efficiency in the long run MC AC LRAC C1 SRATC1 Economic Efficiency SRATC2 C In the short-term Ce 0 Q Output 0 Q1 Qe Output From Fig 1b above, the market productive efficiency level can be best measured in the long run. In the long run, the various short term output levels on the scale of production compared, reveals the most minimum cost as a result of producing a unit more of output. As shown in Fig 1b, the most efficient level of production is at CeQe on the short run average total cost 2(SRATC2) as compared to C1Q1 on SRATC1 though if the cost of production were considered separately...
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