CHAPTER 6 : PRICING AND OUTPUT UNDER PURE COMPETITION

Break-even Point- the state when a firm’s total revenue just equals its total cost.
Economic Profits- the difference between the net income of the firm and the opportunity cost of
the inputs used; also known as economic value added.
Long run- A sufficiently long period of time wherein a firm can complete all desired input
adjustments; new firms can enter the market and existing firms can depart.
Long-run Equilibrium- the condition when the firm has neither incentive nor opportunity to
change what it is doing; it is when there is no more economic profits to be had nor any losses to
be incurred.
Marginal Cost- the additional cost incurred when additional units of output are produced.

Marginal Revenue- the additional revenue obtained by putting the additional units of output in
the market.

Profits- pure surplus or an excess of total receipts over all costs of production incurred by a firm.
Pure Competition- a market wherein there is a large number of buyers and sellers of a
commodity, each too small to affects price, whereoutputs of all firms in the market are
homogenous, and where there is perfect mobility of resources.
Short run- a time period in which a firm can vary is output but does not have time to change its
plant size and the number of firms in an industry fixed because new firms do not have time to
enter to enter and existing firms do not have time to leave.
Shutdown price- the price that would force the producer to stop production because of losses; it
is when the market price is less than the minimum average variable costs.

A market is said to be PURELY COMPETITIVE:

1. There is large number of seller and buyers of thecommodity.

2. The outputs of all firms in the market are homogeneous.

3. There is perfect mobility of resources.

PERFECTLY COMPETITIVE - contains all the characteristics of pure competition

Obligation - incurred to the owners of the corporation’s capital

The break even point (BEP) is obtained when total revenue equals total cost .

Equation : BEP : TR = TC
Marginal Revenue = TR/Q

Marginal Cost = TC/Q

To maximize profits or minimize losses , the competitive firm should produce at the point where
MR = MC.

early stages of production where output is relatively low profit is maximize where mr=mc. this is
obtained at output 18.

the cost of production is less than the market price , the firm attains profit.

ECONOMIC PROFIT would be achived if all expenses and average dividends would be subtracted
from gross sale or gross income and a differential still remains.
ZERO PROFIT is achieved if costs (which included all expenses + average dividends) equal
revenues. When the firm has zero profit , the firm is just breaking even.

long-run equilibrium price and output, we refer to the situation in which market price and
output and the short-run equilibrium price and output tend in a period of time long enough to
allow the following things:
1.Completion by firms of all desired adjustments;
2. Entry of new firms; and
3.Departure of old ones.

invisible hand"theory is at work in a competitive market system.

Perfect competition allocates resources toward the efficiency and equity that most satisfy
society's needs and wants.

Price competition induces sellers/producers to find the most efficient sources and use them
most efficiently.

SHORTCOMINGS OF THE COMPETITIVE PRICE SYSTEM

1. The income distribution problem

2. Market failure: External costs and public goods

spillover or external costs - avoided cost

Unbridled competition - may cause profit seeking firms to brutally exploit farmlands
Chapter 7 : Monopoly

MONOPOLY - is virtually non-existent in basic manufacturing industries Ex. tobacco industry and
thesteel industry

PURE MONOPOLY - a single firm producing a commodity or a service for which there are no
close substitutes.

Competitive firm - Price Taker

the monopolist is faced with following questions:

1. At what point would I be losing?

2. At what point would I break even?
3. At what point would I maximize profit?

Maximum profit - is achieved when the positive difference between the total revenue and total
cost is greatest.

equilibrium output of a monopolist is the output at which total profits are maximized.

One of the barriers to entry into a monopolisticindustry is the question of size or economies.

Price discrimination occurs. First, the monopolist can keep markets apart.
Second, for price discrimination to ne effective and profitable.

equilibrium price is reached where price equals cost of production or the lowest point of the
average cost curve.

Chapter 8 : Monopolistic Competition

"intermediate market structures that can be classified into two categories:

1. monopolistic competition; and

2. oligopoly

These two market structures are often lumped together into a market characterized by
"imperfect competition.

"American economist, Edward H. Chamberlin, who developed the theory of monopolistic

competition.
he said that there are only very few honest to goodness monopolies because there are very few
commodities for which close substitutes do not exist; similarly, there are very few com- modities
that are entirely homogeneous.

In many cases, products are heterogeneous rather than homogeneous; thus, pure competition
cannot exist because of its assumption of homogeneity.

Competition - exists because each is a close substitute for the other.

"Real" differences - can exist through functional features, material, and design which are
important aspects of product differentiation.

"Imaginary" differences - can exist through effective use of advertising. packaging, trademarks,
and brand names.

Monopolistic competition - large number of small producers or suppliers offer similar but not
identical products. (e.g., Biogesic, Medicol, Advil) Ex. Safeguard, Lifebuoy, Palmolive

In Burma, there are many producers in a monopolistic competition.

Product differentiation - prefer the products of one producer over others, resulting in a degree
of control over price and a negatively shaped demand curve.

When we talk about long-run equilibrium, we refer to the three types of adjustments firms are
faced with:

(1) the firm can build any desired size of plant;

(2) where entry open and when profits are being made, it is possible for new firms to enter the
market;

(3) in case losses are being incurred, losing firms can make an exit in the industry

Blocked entry into an industry characterized by monopolistic competition will not be the usual
case; still it may, and sometimes occur. When it occurs, it is usually the result of legislative
activity of some kind.

First, the firm under monopolistic competition is likely to produce fewer goods and charge
relatively higher prices than under pure competition.

Second, in comparison with monopoly, firms under monopolistic competition are likely to have
greater output, lower prices, and thus lower profits.

Producers - would prefer a market characterized by pure monopoly because profits are greater
compared with those prevailing under monopolistic competition.

Third, firms under monopolistic compe- tition may be somewhat inefficient because they tend
to operate with excess capacity.

Pure profits are made by the firm so long as the average cost curve lies below the market price.

Chapter 9 : Oligopoly

Cartel - a formal organization of producers within a given industry

Centralized cartel - monopolistic maximization of industry profits by the firms in the industry;
surrendered power to make price and output decisions to a central association.

Collusion - a secret agreement between two or more persons or institutions to achieve certain
objectives among the industry
Imperfect collusion - made up mostly of tacit informal arrangement under which the firms of an
industry seek to establish prices and outputs.
Kinked demand curve - rigid or “sticky”prices common in oligopoly; particularly sticky downward
since firms in oligopoly normally do not lower their prices.
Oligopoly - a market structure characterized by a small number of firms and a great deal of
interdependence among them.
oligopolist formulates his policies in relation to what his rivals might make.

Oligopolies are classified either as pure oligopoly or differentiated oligopoly.

Pure Oligopoly - products produced by thevarious firms are identical

- found in capital goods ( cement and oil)

Differentiated oligopoly - industries where products are not homogeneous.

- found in consumer goods. (Car and appliances)

collusion - involves direct negotation and agreements among competitors.

There are at least three major incentives leading oligipolistics firms toward collusion:
1.They can increase their profits if they can decrease the amount of competition

2. Collusion can decrease oligopolistic incertainly.

3. Collusion among the firms already in an industry willfacilitate blocking newcomers from that
industry.

Cartel - example of perfect collusion

Organization of Petroleum Exporting Countries(OPEC) - exampe of Cartel

A cartel’s purpose is to transfer certain management decisions and functions of individual firms
to a central association

Cartel, in order to be successful and effective, must possess the following characteristics:
1. All producers or sellers in the industry are included in the agreement;
2. The agreement is definite and enforceable to all parties involved;

3. It covers both the price to be charged and the quantity of output to be produced by each
agreeing seller and the output allocation being calculated as to minimize the aggregate cost of
producing the total output of the industry;
4. It also includes a formula for distributing the profits of the combined operations among the
agreeing parties; and
5. All parties adhere rigorously to the terms of agreement

Imperfect collusion - is made up mostly of tacit informal arrangements

-Collusion of this type result from the failure to meet one or more of the characteristics of
perfect collusion

1. Incompletely observed collusion - not rigorously observed by some or all of the sellers;

2. Collusion with indefinite terms of agreement among sellers affecting prices or outputs - either
ambiguous or ambiguously understood by some or all of the sellers;
3. Collusion with incomplete participation of the sellers in the industry - formal or tacit
agreement among sellers affecting prices

4. Interdependent action without agreement - no formal agreement

Centralized Cartel

- collusion in complete form

- surrendered power

OPEC consists of 12 major oil producing countries,including Saudi Arabia, Iran, Venezuela, Libya,
Algeria, Angola, Ecuador, in Iraq, Kuwait, Qatar, United Arab Emirates, and Nigeria.

Kinked Demand Curve - Paul Sweezy

NATURAL BARRIERS- consist of the difficulty of putting up a large and complex plant.
ARTIFICIAL BARRIERS- First, Government regulations and patent rights

Chapter 10 : Welfare and Equilibrium

Welfare - the state of well-being of the persons comprising an economic system.

Equilibrium - state of rest, a position on which there is neither incentive nor opportunity to
move.

Pareto optimal situation - where no one can be better off without making someone else worse
off, is the best solution.

Stable equilibrium positions - lead economic units towards equilibrium

- cause units to move away.

Partial equilibrium - focusing on the movement of economic units towards equilibrium positions

General equilibrium - emphasizes the interdependence of all economic units and segments of
the economy. It requires all units to achieve simultaneous partial or particular equilibrium
adjustments.

Leon Walras

- first to design a model of the general equilibrium of a purely competitive economy.

- most economists find it convenient to discuss general equilibrium in mathematical terms.

Wassily W. Leontief

- input-output analysis. It divides the economy into a number of sectors or industries.

Vilfredo Pareto

- who also contributed to the mathematics of general equilibrium theory

Input-output analysis

- is the statistical measurement of the input and output of all industries taken together in an
interdependent system of mmodity flow.

Congested facilities- represent a very common type of externality.

Monopoly Monopolistic Perfect Oligopoly

Competition Competition

Number of One Very Many Very Many Few

firms

Nature of Unique Differentiated Undifferentiated Differentiated or

Products Undifferentiated

Implication on Inelastic Elastic Perfectly Elastic Elastic

Demand
Curves

Profit Making Great Normal Profits Normal Profits Normal Profits

Posibilities

Government Great None None Some

Intervention

Freedom of Restricted Unrestricted Unrestricted Restricted

Entry

Average size Large Small Small Large

of firm

Examples Meralco,Lrt,MWSS Soda Rice Producers, Opec, Calex,

Companies, Fast Mom and Pop Petron, Shell
Food Shops
Companies

Price and Output

It refers to a time period in which a firm can vary its output but does not have time to change its
plant size.

C. Short run

It is the activity of making, providing, purchasing, or selling goods or services.

A. Economic Activity

It is a pure surplus or an excess of total receipts over all costs of production incurred by a firm.

A. Profit

The condition when the firm has neither iincentive nor opportunity to change what it is doing; it
is when there is no more economic profits to be had nor any losses to be incurred.

A. Long run equilibrium

It refers to a market wherein there is a large number of buyers and sellers of a commodity, each
too small to affects price where output of all firms in the market are homogeneous, and where
there is perfect mobility of resources. :

B. Pure Competition

It induces sellers/producers to find the most efficient sources and use them most efficiently

C.Price Competition

This correctly implies that in some lines of production, there are significant costs which producer
filters and avoids.
A.Spillover or external cost

A market is said to be purely competitive except;

C. the product of any seller is not considered exactly alike in all respects to the products of any
other seller

Monopoly

If pure monopoly refers to the form of market organization in which there is a single firm
producing a commodity or a service for which there are no close substitutes. Then, what do you
call a virtually non-existent basic manufacturing industry but was fairly common in steel,
aluminum, tobacco, and other areas?

C. Monopol

It may be to the advantage of the monopolist to engage in sales promotion activities of this kind.

D. Sales Promotion

If the monopolist wants to sell more of the commodity or service, what will the competitive
firms do?

A. He must lower his price

The difference between a pure monopolist and a purely competitive seller lies in the
demand side of the market.

A. The Demand Curve

It is widely practiced in our economy. The sales representative who must communicate
important information to the company headquarters has to use the more expensive long-
distance telephone service.

D. Price Discrimination

There is a tendency for a monopolist to minimize profits and being the only one in the market.

B. False

It arrived when total revenue was equal to total cost.

D.Break-even Point

It refers to the form of market organization in which there is a single firm producing a
commodity or a service for which there are no close substitutes.

B. pure monopoly

A market with few entry restrictions and with many firms that sell differentiated products is.

C.monopolistically competitive

Given the market price of a product, the monopolist is faced with following questions, EXCEPT:

B. At what point would I minimize consumer surplus?

Monopolistic competition ( 25-36)

They can choose the style, type , shape, and color of the package that most nearly suits their
wants or fancy depending on the amount of money they have. Choose the Best answer

B. Consumer
In between the extremes of pure competition and monopoly, there exist a intermediate market
structures which classified into two categories:

B. Monopolistic competition and oligopoly

What are the key characteristics of a monopolistically competitive market structure?

D. All of the above

The price will equal the average cost of production unless entry into the industry is blocked.

a. long run

Refers to the market organization in which a relatively large number of small producers or
suppliers offer similar but not identical products.

C. Monopolistic competition

Question: In the long run equilibrium, we refer to the three types of adjustments firms are faced
with except;

c. the firm may belong to a trade association

Monopolistic Competition (1-12)

The entry of new firms into the industry will affect the production cost of existing firms.

B. Correct

How would you describe the demand curve facing the monopolistic competitor?

D. not perfectly elastic

When it occurs, it is usually the result of legislative activity of some kind.

A. Blocked Entry

As new firms enter, they compete for the market share of existing firms. What its effect to the
demand curve and marginal revenue curves?

C. the curves by each firms shifts downwards

It refers to the market organization in which a relatively large number of small producers or
suppliers offer similar but not identical products.

D. Monopolistic competition

A market organization in which there is a relatively large number of small firms, producing
homogenous products with close substitutes.

C. monopolistic competition

This monopolistic competitor is not perfectly elastic, as it is in pure competion.

B. Demand Curve

Monopolistic competition and oligopoly are often lumped together into a market characterized
by what?

C.Imperfect competition
Refers to the form of market organization in which there is a single firm producing a commodity
or a service for which there are no close substitutes.

C. pure monopoly

It is heterogeneous rather than homogenous; thus, pure competition cannot exist because of its
assumption of homogeneity.

C.Products

Oligopoly (13-24)

It is which are restricted and prices are increased above the levels of costs since product price
tends to be higher than mar- ginal cost?

C. Output

It is an example of collusion in its most complete form.

C. The Centralized Cartel

What term does not mean that all the firms in the market charge identical prices?

B. Short-run equilibrium

It is the basic idea behind monopolistic competition is that most firms face relatively close
substitutes and that most commodities are not completely homogenous from one producer to
another

B- Product Differentiation

What competition have thousands or even million producers?

B. Pure Competition

Which among the classification of oligopoly markets describes that if the products produced by
the various firms are identical?

C. Pure Oligopoly

Which term best describes the interdependence among firms in an oligopoly market?

D. Mutual Dependence

Welfare and Equilibrium (25-36)

It is concerned with the movements of individual economic units toward equilibrium positions in
response to the given economic conditions confronting them.

C.Partial Equilibrium

It occurs if the consumption of a good by someone else affects the level of satisfaction attained
any given consumer.

C. externality in consumption

It is a line or curve in the Edgeworth box which passes through the points of tangency between
two individual indifference curves.

B.Exchange contract curve

It occurs if the production of goods by one seller affects the level of production by any other
given seller?
D. Externality in Production

The following are the limitations of General Equilibrium theory, EXCEPT:

C. It furnishes the conceptual foundation for the input-output analysis.

A large part of the analytical structure that we have built up.

C.Partial Equilibrium analysis

D. Input - Output analysis

He was the first to design a model of the general equilibrium of a purely competitive economy?

A. Leon Walras

The state of well-being of the persons comprising an economic system?

C. Welfare

The input and output of all industries integrated in an interdependent system are measured
statistically as commodity flow.

C. Input- Output analysis

What distinguishes the concepts of welfare and equilibrium in economics?

A.Welfare is the state of well-being of individuals within an economic system, while equilibrium
refers to a state of rest where there is no incentive to move.