Understanding Market Structures and Optimum Output Conditions

Perfect Competition Properties

• P=MR
• Many Producers
• Homogeneous Product
• Many Buyers
• Price Taker
• Complete Knowledge of Input and Producer Prices
• Easy Entry and Exit

Monopoly Properties

• Heterogeneous Product
• One Producer
• Many Buyers
• Difficult Entry
• Producers Decide Price

Monopolistic Properties

• Many Buyers & Producers
• Slightly Differentiated Products
• Good Substitutes
• Easy Entry and Exit
• Producers Decide Prices

Oligopoly Properties

• Small Number of Firms
• Homogenous or Heterogeneous Product
• Price Decided by Firms
• Non-Price Competition

Optimum Output Conditions

TP= TR-TC, TP Slope = Derivative TP/ Derivative Q, if = 0 Profit is Maximum, MR=MC

1. MR=MC
2. Rising MC
3. P=Minimum AC
4. Zero Economic Profit

Slope MR is Horizontal, Per Unit Profit = P –AC, Total Profit = (P-AC)Q

Profit Situation= P>AC, Loss Situation=P

Why is P=MR in Perfect Competition?

Because your demand curve is horizontal. No matter how much you produce, it always sells at the same price. In other market structures, you can raise or lower price

Why is MR below the Demand Curve?

Marginal revenue is less than price. Because the monopolist must lower the price on all units in order to sell additional units, marginal revenue is less than price. Because marginal revenue is less than price, the marginal revenue curve will lie below the demand curve.

Shut Down Analysis

Case 1: if AVC < AC, The firm should continue production in spite of making loss

Case 2: P= Min AVC or Per Unit Loss = AFC, The firm's presence is felt in the market and Producer is indifferent about continuing or shutting down.

Case 3: P > AC

Types of Oligopoly

• Duopoly: Two producers
• Oligopoly: Homogenous products
• Differentiated Oligopoly: Differentiated Products

Models of Oligopoly

Price Leadership Model: Few forms in the industry producing a homogenous product. A big or low cost firm becomes a dominant leader for price fixing. It fixes its price when its output is the optimum which maximizes its profit. Other firms are the price takers. The dominant firm allows other firms to sell before it at the price fixed by the dominant firm. It fills the remaining gap in the market.

Cartel Arrangements

Two firms in the industry decide product price. Industry output EQ= Q1+Q2. Both firms make profit. The more efficient the firm, the higher its profit over the less efficient. Per unit price is shown by the difference between P & their AC. The cartel assures that all member firms make profit. The loss-making leave it because they make it weak, and they don’t bargain.