Microeconomics

Lecture 7Supply of a competitive firm

Institute of Economic Theories - University of Miskolc

Mónika Kis-OrloczkiAssistant lecturer

Competitive market/pure competition

• Definition: A market where each economic agent takes the market price as outside of his or her control.

• Caracteristics of the pure competition:– Large number of independant consumers and suppliers on

the market non of them are dominant– Homogeneous products: all firms produce products

satisfying the same needs– Free entry and exit (no legal or financial obstacles)– The economic agents on the market are „price-takers”,

market price is determined by the demand and supply on the market

Price at pure competition

• Price is a given factor for the company in pure competition

• Price is determined by the actors of the market, but one supplier itself can not change the priceprice-taker

Requirements• No influence on the price, market price is only determined

by market demand and supply

• Racional economic agents

• Well-informed economic agentsAim of the competitive

firm• To maximize the difference between the revenue and the

costsprofit-maximization: πmax

Calculation of profit • Profit: π=TR-TC• Total revenue (TR= P*Q): The amount received from the

sale of the productIn case of pure competition, the company sells at a fixed price, so TR is linear

• Total Cost (TC): Fixed costs plus variable costs

• Marginal revenue: ( ) the extra revenue one gets from increasing the quantity sold by one unit

• Marginal Cost: ( ) the increase in total cost that results from producing one more unit of output

• Marginal Profit: (Mπ=MR-MC)

Total and marginal revenue

MR

TR

P

MR

AVC=VC/qAC=TC/Q

Profit-maximisation

• A firm, that is maximising his profit increases the production until his growing MC reaches the market price (on the last piece there is no profit at all) (MC=P)

• Continues the growing production until the product that is not causes loss yet.

• In pure competition MR equals with market price (MR=P)

• π is maximal if Mπ=0

πmax MR=MC=P

Positive Economic ProfitP

Q

MC

AC

AVC

P1

ACq1

q1

P1> ACmin

P1 * q1= TRACq1

* q1= TC=FC+VC

(P1 -ACq1)* q1=Economic profit

P

Q

MC

AC

AVC

Recovery point (F)

Recovery point is at P=ACmin , both costs are recovered butEconomic profit=0, the firm realizes normal profit

MR

Recovery point (F)

P=ACmin

MC=AC

P2

q2

P2 * q2= TC

P

Q

MC

AC

AVC

Minimizing the loss

AVCmin < P3 < ACmin

P3

ACq3

q3

AVCq3

Loss

ACq3* q3= TC=FC+VC

(ACq3- P3)* q3=Loss

(ACq3- AVCq3)* q3=FC

AVCq3*q3 =VC

P

Q

MC

AC

AVC

Shutdown point (Ü)

P4 = AVCmin

P4

ACq4

q4

•At shutdown point MC=AVC•The firm can decide to produce or not to produce•At a price under P4 is not worth procucing, because not even the variable costs are recovered

LossACq4

* q4= TC

P4 * q4= VC(ACq4

- P4)* q4=Loss

P

Q

MC

AC

AVC

Individual supply of the competitive firm

The individual short-run supply curve of a competitive firm can be found in the increasing part of its Marginal Cost (MC) function above the intersection point with the AVC curve, above the shutdown point.

The short-run industry supply

• The industry supply= market supply

• It is the horizontal sum of the individual supplies of the competitive firms at the different prices.

• The more actors are on the market, the flatter the market supply is.

The short-run industry supply

Long-run supply• Long-run supply is the function of the market price and

the number of producers present on the market

• P= LAC=LMC

• The competitive firms in long-run does not realize

economic profit, only normal profit

• „Little-shop example”

• In long-run the competitive company can not finance the

loss, so does who are realizing losses has to exit the

market

Microeconomics

Lecture 9The monopoly

Institute of Economic Theories - University of Miskolc

Mónika Kis-OrloczkiAssistant lecturer

Definitions

• Monopoly: A market structure in which the product is supplied by a single firm. There is only one supplier, producer in the market. (S)

• Monopolistic competition: A market structure in which there are many sellers who are supplying goods that are close but not perfect substitutes of each other. In such a market each firm can exercise some effect on its product’s price.

• Monopsony: A market in which there is a single buyer. (D)

• Oligopoly: A situation of imperfect competition in which an industry is dominated by a small nnumber of suppliers.

• In a monopolistic market there is no substitute of the product, no other products can satisfy the needs in the same way The monopolistic company is ‘price-maker’

Demand and Supply on the market• Demand: inverse ratio between the P and D;

D depends on price, income, needs… but not on the market position of the firm

• Supply: direct ratio of P and S, but if S increases, the P decreases; in pure competition supply of 1 firm does not effect the market price as it is price-taker, but the monopoly can influence the price

Caracteristics of competitive market and monopoly

• Market: – Competitive market: lots of buyers and lots of sellers meet– Monopoly: demand of many buyers meet with the supply

of one single company

• Choice of buyers:– Competitive market: the buyer can choose from whom to

buy– Monopoly: no choice as there is only one seller

• TR– Competitive market: depends on Q only as P is determined

by the market– Monopoly: depends on Q and on P as well

Total Revenue

Competitive market Monopoly

TRmax

DMR

MR

– Competitive market: lots of actors in the market, firms know neither the market demand curve nor the total supply

– Monopoly:one seller meets all the market demand, so the monopolist company knows the market demand and can adjust its supply to the demand.

• Monopoly wants to achieve maximum revenue

Profitmaximization of the monopoly

Recovery point

D and AC has only one common point, it is where MC=MR

Minimizing loss

• The recovery and shutdown point of monopolies can’t be connected to one remarkable point or output.

• Recovery point AC=P MC=MR• Shutdown point AVC=P MC=MR• There is an endless number of situations

where the firm is operating in its recovery point and its profit is maximal.

• Long run: the profit of the monopoly can’t be negative.

Comparison of competitive market and monopolyCompetitive market Monopoly

1. πmax MC=MR=P MC=MR≠P

2. PMarket D and S determines a given factor by the market

Monopoly can determine by determining its own supply

3. TRDepends on Q increasing the output increases the revenue

Depends on P and Q, increasing the output causes decrease in P, TR can even decrease

4. S Part of MC that is above AVC

Has no S curve it is only 1 point MC=MR

Competitive market Monopoly

5. Market S∑MC

Horizontal sum of individual S curves of the competitive firms

MC=MROnly one point S of the firm is the market S as well as there is only 1 supplier, the monopoly

6. Recovery Point

P=ACmin

P=AC≠Acmin

andMC=MR

7.Shutdown

pointP=AVCmin

P=AVC≠AVCmin

andMC=MR

Competitive market Monopoly

8. Economic

profit

Both companies produce economic profit if P>AC, but in a monopolistic company it is not in ACmin

6. Equilibrium D=S

The monopoly determines the P according to the market D where MC=MR, but the

demand is not equal with the

supply

Conclusions

• SM < SC and PM > PC

• The loss caused by the lower output and higher price of the monopoly is called: welfare loss, efficiency loss or deadweight loss

P

Q

PM

PC

QCQM

SC =∑MC

A

B

EC

MR D

Deadweight loss of the monopoly

F

G

•Consumers’s surplus (CS)•CSC= A; E; PC triangle •CSM= A; B; PM triangle (red)•Difference is PM ; PC ; B; E trapezium (green and blue)

•The monopoly transforms one part of the difference into Producers’ surplus (green), the other part is called the deadweight loss (BCE triangle)

• Deadweight loss: the loss for the society caused by the lower production and higher price of the monopoly. This quantity is not even produced by the monopoly so it is an efficiency loss.