3.2 Efficiency of the market structures using marginal analysis

1. 3.2 Efficiency of the market structures using marginal analysis

2. What is in this topic? • providing an explanation of: • pricing and output decisions for perfectly competitive and/or monopolist firms using marginal analysis • efficiency of a market structure • impact of a change in a market on the short and/or long run pricing and/or output decisions of a firm using marginal analysis • the impact of a change in a market on the short and/or long run pricing and/or output decisions of a firm using marginal analysis • a government policy to improve the efficiency of a monopoly market

3. What is in this topic? • Marginal analysis refers to using marginal revenue and marginal cost to determine the output and pricing decisions of firms. This includes demonstrating understanding: • that perfectly competitive firms operate at the profit maximising output where P(=MR) = MC and are allocatively efficient; and/or • that monopoly firms operate at the profit maximising output where marginal revenue equals marginal cost (MR = MC) but are allocatively inefficient.

4. Markets and behaviour? Generally firms will operate differently depending on the amount of other firms they compete with! Dam! You will take my customers I am going to have to do something about that! I will sell mine at 50% off! Huh! I am the only seller of these arrows! I will charge what I want! I am your twin brother and I will sell them too! Ha ha ha…. Ok. I will sell mine at 60% off!

6. Characteristics of Perfect Competition Examples of PC Find!!!!!!!!!!! Characteristics of Monopoly Examples of M

7. Reveiw

8. Monopoly or Perfect Competitor? • Characteristics of a perfectly competitive firm • Large number of buyers and sellers • Perfect knowledge exists • Firms are “price takers” • Homogenous products (goods are exactly the same) • No barriers to entry and exit in the industry. Perfect Competitor? Monopoly?? Hallensteins ASB Bank Fish and chip store Wellington Trains Sheep farmer Stadium Food Petrol station Tuck Shop

9. Removing the smoke and mirrors

10. Perfect Competitor - Costs

11. Apple Revenue

12. AR = MR = P = D • For a perfect competitor AR=MR=P=D. • They face a horizontal demand curve because their supply is relatively small compared to the market supply. • Therefore they are a price taker.

13. Market for Apples Individual Producer Apples AR/MR/P/D

14. Revenue plus Costs Perfect Competitor MC AR/MR/P/D

15. Book work Pg85-86 Q 1-4

16. Review Quiz Give 2 examples of the characteristics of Perfect Competitors. True or false, The demand curve for a perfect competitor is perfectly inelastic Profit maximising position for a perfect competitor is AR=MR True or false? Give an example of a perfect competitor. Name the concept which suggests that an individual perfect competitor is to small to influence market price.

17. Perfect Competitor Profits Market Individual MC AR/MR/P/D

18. Perfect Competitor Profits Short-run MC AC AR/MR/P/D

19. Perfect Competitor Profits Short-run MC AR/MR/P/D AC

20. Perfect Competitor Profits Short-run/long-run MC AC AR/MR/P/D

21. Long-run vs Short-run

22. The Key Characteristic

23. I just made a million dollars!!!! Yehaaaah!

24. Long-run Market Individual MC What happens to PC super-normal profits in the long-run? Where will profits return to in the long-run? AR/MR/P/D

25. Darn gonit I just lost 1 million dollars!

26. Long-run Market Individual MC What happens to PC sub-normal profits in the long-run? Where will profits return to in the long-run? AR/MR/P/D

27. Monopoly

28. Reminder

29. One Key Characteristic I am a Price Makerrrrrrrrr

30. Revenue Exploration What are the differences in the curve? Draw the Revenue curves.

31. Curve Exploration MC TR AR MR

32. Tell me 1 thing!

33. Monopoly profit levels

34. Profit for a Monopoly SHORT-RUN Sub-Normal Profits MC MC Normal Profits AC Super-Normal Profits AR AR MR MR

35. Short run vs Long run

36. Profit for a Monopoly SHORT-RUN Sub-Normal Profits MC MC Normal Profits AC Super-Normal Profits AR AR MR MR

37. Profit for a Monopoly LONG-RUN MC MC Normal Profits AC I am the market. You shall not enter Super-Normal Profits AR AR MR MR

38. Monopoly and Perfect competitor Allocative Efficiency

39. A brief lesson Optimal distribution of goods and services with consumer preferences in mind. Market S The price that consumers are willing to pay is equivalent to their Marginal Utility. D

40. Market S D

41. Lets Apply Allocative Efficiency MC/S AR/MR/P/D

42. Lets Apply Allocative Efficiency MC/S AR/D MR

43. Monopoly vs Monopoly Allocative Efficiency

44. Lets see who remembers Allocative Efficiency MC/S AR/D MR

45. What are the differences? VS

46. What are the differences? A business that is able to supply the whole market at a lower price than two or more firms. Points: • Natural monopolies are entire industries not just single firms • Usually involve some sort or network or infrastructure • High initial start up costs act as the barrier to entry in the market

47. Comparison Natural Monopoly High set up costs, low marginal cost! Normal Monopoly Market share and market power! Normally create dead weight loss by restricting quantity or price to make super-normal profits. Can supply the market cheaper than two or more firms operating in the market!

48. Normal monopolist For a normal monopolist, they will not experience Economies of Scale throughout there relevant output range Revenue MC/S At the relevant range of output, Average Cost is rising!!!!! AC AR/P/D Relevant range of output Output MR

49. Natural monopolist MC/S AR/D MR

50. The good and the bad NM