3.2 Efficiency of the market structures using marginal

analysis

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

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.

What is in this topic?

Generally firms will operate differently depending on the amount of other firms

they compete with!

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….

Dam! You will take my customers I

am going to have to do something about that! I will sell mine at 50%

off!

Ok. I will sell mine at 60% off!

Markets and behaviour?

Types of markets

Monopoly

Monopsony

Perfect competitor

Find!!!!!!!!!!!

Characteristics of Perfect Competition

Examples of PC

Characteristics of Monopoly

Examples of M

Reveiw

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 BankFish and chip store Wellington TrainsSheep farmer Stadium FoodPetrol station Tuck Shop

Removing the smoke and mirrors

Perfect Competitor - Costs

Apple Revenue

• 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.

AR = MR = P = D

Market for Apples

Individual Producer Apples

Revenue plus CostsPerfect

Competitor

Book workPg85-86 Q 1-4

Review Quiz1. Give 2 examples of the characteristics of

Perfect Competitors.2. True or false, The demand curve for a perfect

competitor is perfectly inelastic3. Profit maximising position for a perfect

competitor is AR=MR True or false?4. Give an example of a perfect competitor.5. Name the concept which suggests that an

individual perfect competitor is to small to influence market price.

Perfect Competitor ProfitsMarket IndividualMC

Perfect Competitor ProfitsShort-run MC

AC

MC

AC

Perfect Competitor ProfitsShort-run

MC

AC

Perfect Competitor ProfitsShort-run/long-run

Long-run vs Short-run

The Key Characteristic

I just made a million

dollars!!!! Yehaaaah

!

Long-runMarket IndividualMC

What happens to PC super-normal

profits in the long-run? Where will profits return

to in the long-run?

Darn gonit I

just lost 1 million dollars!

Long-runMarket IndividualMC

What happens to PC sub-normal profits in the

long-run? Where will profits return

to in the long-run?

Monopoly

Reminder

One Key Characteristic I am a Price

Makerrrrrrrrr

P($) Q TR AR MR

12 1

10 2

8 3

6 4

4 5

Revenue Exploration

Draw the Revenue curves.

What are the

differences in the curve?

Curve ExplorationMC

Tell me 1 thing!

Monopoly profit levels

MCMC

Profit for a MonopolySHORT-RUN

AC

Super-Normal Profits

Sub-Normal ProfitsNormal

Profits

Short run vs Long run

MCMC

Profit for a MonopolySHORT-RUN

AC

Super-Normal Profits

Sub-Normal ProfitsNormal

Profits

MCMC

Profit for a MonopolyLONG-RUN

AC

Super-Normal Profits

Normal Profits

I am the market. You shall not

enter

Monopoly and Perfect competitorAllocative Efficiency

Market S

D

A brief lesson Optimal distribution

of goods and services with

consumer preferences in mind.

The price that consumers are willing to pay is

equivalent to their Marginal Utility.

Market S

D

Lets Apply Allocative Efficiency MC/S

MC/S

Lets Apply Allocative Efficiency

Monopoly vs MonopolyAllocative Efficiency

MC/S

Lets see who remembersAllocative Efficiency

VS

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 firmsUsually involve some sort or network

or infrastructureHigh initial start up costs act as the

barrier to entry in the market

What are the differences?

ComparisonNatural Monopoly

High set up costs, low marginal cost!

Normal MonopolyMarket share and market power!

Can supply the market cheaper than

two or more firms operating in the

market!

Normally create dead weight loss by

restricting quantity or price to make super-

normal profits.

Normal monopolist

Output

Revenue

AR/P/D

MR

MC/S

AC

Relevant range of output

At the relevant range of output, Average Cost is rising!!!!!

For a normal monopolist, they will

not experience Economies of Scale throughout there

relevant output range

MC/S

Natural monopolist

The good and the badNM

What if more companies produced rail travel?

This isn’t an efficient use of our resources

Houston we have a problemNatural monopolies produce at a lower cost than 2 or more firms! But they want to maximise their profits!!!!!

Output

Revenue

AR/P/D

MR

MC/S

Profit Max.

AllocativeEfficiency

S = DMC = AR

MC = MR

Output

Revenue

AR/P/D

MR

MC/S

Pm

Qm

Ps

Qs

Natural Monopolists will produce at MC= MR.

At this position the product is over priced and under produced.

This is not socially desirable!

D.W.L

Houston we have a problem

CS

PS

AR/P/D

Output

Revenue

MR

MC/S

AC

Profit levels!

AR/P/D

Output

Revenue

MR

MC/S

AC

Government Intervention!Regulate so the natural Monopoly produces at MC=AR/S=D.

Price falls and quantity increases! Allocative efficiency achieved! Social optimum and no dead weight loss!

Problem is sub-normal profit is made at this position so may leave the industry at this position.

Government will have to subsidise. This can be a high cost to the Government

Marginal Cost Pricing

Government Intervention!

Output

Revenue

MR

MC/S

AR/P/D

AC

Average Cost PricingRegulate so the natural Monopoly produces at AC=AR

Price falls and quantity will increases! dead weight loss is reduced!

Problem of sub-normal profit is removed and no subsidy is required as the Natural Monopoly will make NORMAL PROFITS!

Problem: Natural Monopoly will inflate their costs so cannot accurately price at AC