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Profit Maximisation
Maximisation under
under
Perfect
Perfect Competition
Competition
and
and Monopoly
Monopoly
Alternative Market Structures
– nature of product
• homogeneous or differentiated?
– monopoly
– monopolistic competition
– oligopoly
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Alternative Market Structures
– monopoly
– monopolistic competition
– oligopoly
• Assumptions
– firms are price takers
– freedom of entry of firms to industry
– identical products
– perfect knowledge
– Output
• where P = MC
– Profit
• (AR – AC) × Q
• possible supernormal profits
Short-run equilibrium of industry and firm under perfect
competition
P £
S MC AC
D = AR
Pe AR
AC = MR
D
O O Qe
Q (millions) Q (thousands)
P £ AC
S MC
AC
D1 = AR1
P1 AR1
= MR1
D
O O Qe
Q (millions) Q (thousands)
P £ AC
S MC
AVC
D2 = AR2
P2 AR2
= MR2
D2
O O
Q (millions) Q (thousands)
LRAC
P1 AR1 D1
PL ARL DL
D
O O QL
Q (millions) Q (thousands)
LRAC
DL
AR = MR
O Q
Perfect Competition
• Defining monopoly
– concentration ratios
Concentration ratios in the UK
Monopoly
• Barriers to entry
– economies of scale
– product differentiation and brand loyalty
– lower costs for an established firm
– ownership/control of key factors or outlets
– legal protection
– mergers and takeovers
– aggressive tactics
Monopoly
– MR below AR
AR and MR curves for a monopoly
Q P
8 (units) =AR
1 (£)
8
2 7
3 6
6
4 5
5 4
AR, MR (£)
6 3
7 2
4
AR
2
Quantity
0
1 2 3 4 5 6 7
-2
AR and MR curves for a monopoly
Q P TR MR
8 (units) =AR (£) (£)
1 (£)
8 8
6
2 7 14
4
3 6 18
6 5 2
4 20
0
5 4 20
-2
AR, MR (£)
6 3 18
-4
7 2 14
4
AR
2
Quantity
0
1 2 3 4 5 6 7
-2 MR
Monopoly
MR
O Qm Q
Monopoly
MR
O Qm Q
Profit maximising under monopoly
£ MC
AC
AR
AC
AR
MR
O Qm Q
Profit maximising under monopoly
£ MC
Total profit
AC
AR
AC
AR
MR
O Qm Q
Monopoly
Monopoly
P1
AR = D
MR
O Q1 Q
Equilibrium of industry under perfect competition and
monopoly: with the same MC curve
£ MC ( = supply under
perfect competition)
Comparison with
P1 Perfect competition
P2
AR = D
MR
O Q1 Q2 Q
Monopoly
MCmonopoly
P1
AR = D
MR
O Q1 Q
Equilibrium of industry under perfect competition and
monopoly: with different MC curves
£ MC ( = supply)perfectcompetition
MCmonopoly
P2
P1
x
P3
AR = D
MR
O Q2 Q1 Q3 Q
Monopoly