Marketing
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CH-6FINA251.pptChapter - 6
Market Structure
Pure Competition
Classification of Market Structure
Market is a place where buyers and sellers meet and exchange goods or services. There are certain conditions which create the structure of a market. It classified to:
1- Pure (Perfect) Competition
2- Monopolistic Competition
3- Oligopoly
4- Monopoly
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Pure Competition
A purely competitive industry has the
following characteristics:
1- Many sellers
2- Low barriers to enter
3- Competitors’ products are identical
4- Buyers have perfect information
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Pure Competition
The objective of any firm is, produce the quantity of output that maximizes its economic profit.
Profit = Total Revenue (TR) - Total Cost (TC)
Example 1
A firm sells 100 products at $2.00 each. Its total
cost is $160. What is its profit?
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Profit Maximization of a Purely Competitive Firm
Example 1 answer
Profit = TR – TC
TR = P x Q = $2 x 100 = $200
Profit = $200 - $160 = $40
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Profit Maximization of a Purely Competitive Firm
Because one firm in pure competition is a small part of the entire market, it can supply more products to the market without significantly affecting the supply and the price.
For example, if the market price is $2, then a purely competitive firm can sell 100 products at $2, 110 products at $2, or 120 products at $2.
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Marginal and Average Revenue
Marginal revenue
is the additional revenue per product. For example,
if at Q = 100, TR = $200, and at Q =110, TR = $220, then MR = ∆TR / ∆Q
= $20 / 10 = $2.
Average revenue
is the revenue per product. If at Q = 100, TR = $200, then AR = TR / Q
= $200 / 100 = $2.
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Marginal and Average Revenue
Demand and revenue for a purely competitive firm, which sells a product at $2 is as follows:
We conclude at pure competitive firm : P = MR = AR
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| Q | Price | TR | MR | AR |
| 0 | $2 | $0 | - | - |
| 100 | $2 | $200 | $2 | $2 |
| 110 | $2 | $220 | $2 | $2 |
| 120 | $2 | $240 | $2 | $2 |
| 130 | $2 | $260 | $2 | $2 |
Profit Maximization of a Purely Competitive Firm
A Purely Competitive Firm’s Total Revenue Curve
Quantity
Price,
Revenue
Total Revenue
100
110
120
200
220
240
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CH 6 - Profit Maximization of a Purely Competitive Firm
A Purely Competitive Firm’s Demand, Marginal, and Average Revenue Curves
Demand,
AR, MR,
Price
Quantity
2.00
D = P = MR = AR
100
110
120
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Profit and Loss
| Economic Profit | TR > TC ATR > ATC | P > ATC |
| No profit or loss Normal Profit ( Break-Even Point ) | TR = TC ATR = ATC | P = ATC |
| Loss but it can continue in production | TR < TC TR > TVC | P < ATC P > AVC |
| Loss. ( Shut-Down Point ) | TR = TVC | P = AVC |
| Loss .Close the firm and stop production | TR < TVC | P <AVC |
Achievement Economic Profit
EP : Equilibrium Point; point of profit maximization. MR = MC
AR, MR,
Price, Costs
Quantity
2.00
D = MR = AR = P
MC
ATC
AVC
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EP
Profit Maximization of a Purely Competitive Firm
The Profit-maximizing Quantity
AR, MR,
Price, Costs
Quantity
2.00
D = MR = AR = P
MC
ATC
AVC
MR=MC
Pam
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Profit Maximization of a Purely Competitive Firm
The Profit Area
AR, MR,
Price, Costs
Quantity
2.00
D = MR = AR
MC
ATC
AVC
MR=MC
100
1.80
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Purely Competitive Firm
The Case of a Loss
AR, MR,
Price, Costs
Quantity
D = MR = AR = P
MC
ATC
AVC
Qlm
1.60
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Purely Competitive Firm
The Case of a Loss and a Shut-down
AR, MR,
Price, Costs
Quantity
1.20
D = MR = AR = P
MC
ATC
AVC
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The Long-run Equilibrium Price and Quantity
AR, MR,
Price, Costs
Quantity
1.75
D = MR = AR
MC
ATC
AVC
Qlr
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Example 1:
If the price of one unit is 10 S.R. , the equilibrium
quantity = 100 units or (production) and the
average cost at the equilibrium point = 8 S.R.
- Calculate the firm’s profit?
- Name the kind of it is profit?
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Example 2 :
If the price of one unit is 9 S.R. , the equilibrium
quantity = 90 units or (production) and the
average cost at the equilibrium point = 9 S.R.
- Calculate the firm’s profit?
Name the kind of it is profit?
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Example 3 :
If the price of one unit is 8 S.R. , the equilibrium
quantity = 80 units or (production) and the
average cost at the equilibrium point = 9 S.R.
- Calculate the firm’s profit?
Name the kind of it is profit?
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Exercise : This table give some data of pure
Competitive Firm X.
| Quantity - Q | Price - P | AVC | ATC | MC |
| 0 | 18 | 0 | - | - |
| 1 | 18 | 5 | 35 | 5 |
| 2 | 18 | 4.5 | 19.5 | 4 |
| 3 | 18 | 4 | 14 | 3 |
| 4 | 18 | 5 | 12.5 | 8 |
| 5 | 18 | 6 | 12 | 10 |
| 6 | 18 | 8 | 13 | 18 |
| 7 | 18 | 10 | 14.3 | 22 |
| 8 | 18 | 12 | 15.8 | 26 |
| 9 | 18 | 15 | 18.3 | 39 |
| 10 | 18 | 20 | 23 | 65 |
By using the previous table answer this questions:
1-Dose firm X earn profit when its produce 6
units.
2- How many units the firm X must produce to
maximize its profit.
3- Calculate the firm profit.
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