Lecture 12 Students Version

Difficulty level:
Challenging
LECTURE 12
90 mins
Perfect Competition in the Short Run
Perfect Competition in the Long Run 30 mins
More Market Structures 30 mins
1
SMU Classification: Restricted
Where are we?
• Basic concepts
• How to produce at minimum cost
• At any given price, how much output should the firm produce?
COR2100 2
Our plan
• Lecture 12
• Perfect competition
• More market structures
• Lecture 13
• Consumer surplus and producer surplus
60 mins
• Government intervention
• Final Review
• Review Questions
• Final Practice Problem
COR2100 3
Part 1
Perfect Competition in the Short Run
4
What is a perfectly competitive market?
• The industry is fragmented: Many firms and many buyers
• The product is homogeneous: Products produced by different firms are the same
• Perfect information about prices: Price takers and a single market price
• No restrictions on entry into the market: Free entry

• Established firms have no advantage over new ones
5
Example: Catfish Farming Industry in US
• The industry is fragmented: Over 1000 catfish farms
• The product is homogeneous
• Perfect information about prices: Just google it!
• Production technology is well understood
COR2100 6
Short Run vs. Long Run (Key differences)
• In the short run:

• Firms choose output that maximizes profit
• Firms have to stay in the market
• In the long run:

• Firms choose output that maximizes profit
• Firms decide whether to exit/enter the market
COR2100 7
Roadmap of the Short-Run Analysis
• Step 1: Profit-maximizing output

• How do firms choose an output level to maximize profit, given a market price?
• Step 2: Construct individual firm’s supply curve

• How does the profit-maximizing output level changes with P ?
• Step 3: Construct market supply curve
• Step 4: Short-run equilibrium: Market demand=market supply

COR2100 8
Profit and Revenue
• Profit=total revenue-total cost
• Total revenue (P☓Q)

• The amount of money the firm brings in from the sale of its outputs
• Marginal revenue
• Change in total revenue results from a one-unit increase in the quantity sold
COR2100 9
E&S Cheeseman (Perfectly competitive)
• Market price is $1.13 per cheese box packed
• Total revenue?
• If a firm sells 1 box
• If a firm sells 9 boxes
• Marginal revenue?
• For the 1st box
• For the 2nd box
• For the 9th box
COR2100 10
Example: E&S Cheeseman

MR=P
Total revenue Marginal revenue
1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13
10.17
9.04
7.91
6.78
5.65
4.52
3.39
2.26
1.13
1 2 3 4 5 6 7 8 9
1 2 3 4 5 6 7 8 9
COR2100 11
Quantity Total revenue Total Cost
Profit=Total revenue-total cost
0
100 E&S Cheeseman profit-maximizing output
0
113
200
272
207 233.91 344
321 362.73 416
444 501.72 488
558 630.54 560
762 861.06 704
854 965.02 776
939 1061.07 848
1019 1151.47 920
1092 1233.96 992
1161 1311.93 1064
1225 1384.25 1136
1284 1450.92 1208
1339 1513.07 1280
1390 1570.7 1352
1438 1624.94 1424
ECON 001 12
Discussion Question: Calculating Marginal

Cost Marginal Cost=Change in total cost/Change
Quantity Marginal revenue Total Cost in output
762 1.13 704 --------
854 1.13 776
939 1.13 848
1019 1.13 920
1092 1.13 992
1161 1.13 1064
1225 1.13 1136
1284 1.13 1208
1339 1.13 1280
1390 1.13 1352
1438 1.13 1424
COR2100 13
Marginal Analysis and Supply Decision
• If MR > MC: Profit increases if output increases
• If MR < MC: Profit decreases if output increases
• If MR = MC: Profit is maximized

• Profit decreases if output changes in either direction
COR2100 14
Step 1: Profit-maximizing output
Firms choose the quantity

MR=MC
P=MC
Discussion Question: Profit-maximizing

What if price falls to $0.79?
output
Marginal Cost=Change in total
Quantity Marginal revenue Total Cost cost/Change in output
762 1.13 704 --------
854 1.13 776 0.79
939 1.13 848 0.85
1019 1.13 920 0.9
1092 1.13 992 0.99
1161 1.13 1064 1.04
1225 1.13 1136 1.13 (1.125)
1284 1.13 1208 1.22
1339 1.13 1280 1.31
1390 1.13 1352 1.41
1438 1.13 1424 1.5
What if price rises to $1.41?
COR2100 16
Step 2: MC = Supply
MC = Supply
Is it true for all prices?
COR2100 17
Think about it…
• Firms will always produce something at any prices in the short run?
• With economic loss, what could the firms do?
• Firms will shut down as long as there is an economic loss?
COR2100 18
Should Tea Party open on Sunday?
• If Tea Party opens on Sunday, it could only achieve a revenue of $800, compared
to $2000 on weekdays. Suppose the costs of the food, servers and utilities are
$700 per day, while the pre-paid rent is $300 per day.
COR2100 19
Temporary Shutdown Decision
• In the short run, the firm has to stay in the market
• Produce something or shut down?
• Minimizes the firm’s loss
COR2100 20
Loss Comparison
•Economic loss = TFC + TVC  TR= TFC + (AVC  P) x Q
• Produce something or shut down?
• If shut down, loss=_______, if produce, loss=_________________
• Shutdown as long as ________________________
COR2100 21
Shut Down Decision
COR2100 22
MC = Supply
MC = Supply
Is it true for all prices?
For P>min AVC
COR2100 23
Short-Run Supply Curve: Portion of the MC Above

AVC
ECON 001 24
Where are we?
• Step 1: Profit-maximizing output

• How do firms choose an output level to maximize profit, given a market price?
• Step 2: Construct individual firm’s supply curve

• How does the profit-maximizing output level changes with P ?
• Step 3: Construct market supply curve
• Step 4: Short-run equilibrium: Market demand=market supply

COR2100 25
Step 3: Market supply curve
• Total quantity supplied by all firms at each price
• Each firm’s capital and the number of firms remain the same
COR2100 26
From individual supply to market supply
• 10000 Firms
Quantity Total Quantity
Supplied By supplied
Individual Firm
0.5 0
0.79 854
1.13 1225
1.41 1500
COR2100 27
Step 4: Short-run equilibrium
COR2100 28
Discussion Question: Short Run Profit
• Profit>0, <0, or =0?
COR2100 29
Short Run Profit
• Profit=Total revenue-Total cost

• =(____________)Q
COR2100 30
Profits and Losses in the Short Run
ECON 001 31
Profits and Losses in the Short Run
ECON 001 32
Short Run Profit
• Profit>0, <0, or =0
• Which one could be a long run equilibrium?
COR2100 33
Part 2
Perfect Competition in the Long Run
34
From Short Run to Long Run
• Profit>0, <0, or =0
• If Profit>0
• The number of firms ____________
• If Profit<0
• The number of firms __________
COR2100 35
Firm Entry in the Long Run
• Market price is 1.13
• What will happen in the long run?
COR2100 36
Firm Entry in the Long Run
ECON 001 37
Firm Exit in the Long Run
• Market price is 0.8
• What will happen in the long run?
COR2100 38
Summary
Profit
Entry
Market supply curve shifts rightward
Price falls
No more incentive for entry (Eliminate the profit)
Entry stops (long-run equilibrium) 39

Summary
Loss
Exit
Market supply curve shifts leftward
Price rises
No more incentive to exit (Eliminate the loss)
Exit stops (long-run equilibrium) 40

Long Run Market Equilibrium
No existing firm has an incentive to exit the market
No potential entrant has an incentive to enter the

market
Every firm is producing at profit-maximizing output level
Market supply equals market demand
COR2100 41
Implications of Long-Run Equilibrium
• Long-run equilibrium price=____________
• Long-run equilibrium profit=___________
COR2100 42
Summary
Short Run Long Run
Equilibrium Price Determined by market min ATC

supply and demand
Profit >,<,or =0 0
Quantity P=MC P=MC

COR2100 43
Application: Mask industry in Covid 19
• The Straits Times 27 March 2020

• ‘Like printing money’: Business booming for China’s mask producers amid
global demand in coronavirus pandemic
• Highlight 1: Globally more than 400,000 have been infected, and demand for
protective equipment is still soaring as nations battle the outbreak
• Highlight 2: In the first two months of the year, a staggering 8,950 new
manufacturers started producing masks in China
COR2100 44
Application: Mask industry in Covid 19
• The market for mask is perfectly competitive and begins in a long run
• What happens in the short run? (Highlight 1)

• What happens in the long run? (Highlight 2)
COR2100 45
Part 3
More market structures
46
Monopoly
• Only one seller provides a good or service that has no close substitutes
COR2100 47
Two Conditions for Monopoly
• No close substitute
• With a close substitute, the monopoly firm faces competition from
the producers of the substitute
• Barriers to entry
• Constraint that protects a firm from potential competitors
COR2100 48
Monopoly
Perfectly Competitive Monopoly (or Near Monopoly)

Industry Fragmented Concentrated: Single Firm
Structure
Pricing Price Takers Price Makers
Barriers to No Barriers to Entry Significant Barriers to Entry
Entry
Koryolink (North Korea’s only 3G
Natural Gas Rigs, Agricultural mobile provider), Singapore Power,
Examples Sectors Microsoft, Some Specialized
Medical Services 49
From Perfect Competition to Monopoly
•P
•Q
• Consumers
• Producers
COR2100 50
Charge Any Price?
• Perfectly competition
• Increasing, decreasing or constant MR?
• Monopoly
• Increasing, decreasing or constant MR?
COR2100 51
Optimal Output and Price

Price Quantity TR MR
$10 1
$9 2
$8 3
$7 4
$6 5
MC=$6
COR2100 52
Is a Monopoly Legal?
• Laws promote competition and regulate anti-competitive activities
• Competition and Consumer Commission of Singapore (CCCS) oversees

anti-competitive activities
• Merger
• Anti-Competitive Agreements
• Abuse of Dominance
COR2100 53
Example: Anti-Competitive Agreements
• CCCS 500/7002/14 (2018)
• Penalized 13 Fresh Chicken Distributors for

• Coordinated the amount and timing of price increases
• Agreed not to compete for each other’s customers in the market
COR2100 54
Abuse of Dominance
• Being a dominant business is fine
• Protecting or enhancing the dominant position is illegal

• Deter competitors from entering the market
• Drive competitors out of the market
COR2100 55
Example: SISTIC Monopoly Case
• Largest ticketing agency in Singapore
• In 2012, it was fined $769,000 for “Abuse of Dominance”
• Exclusive dealing: Agreement with Esplanade

• All events must use SISTIC as the only ticketing provider
COR2100 56
Two More Market Structures
Perfect Monopolistic
Oligopoly Monopoly
Competition Competition
Many competing firms

Few firms competing
Products are differentiated
COR2100 57
Characteristics of Market Structures
COR2100 58
How many firms are necessary to make a

market competitive?
COR2100 59
Key Ideas for Lecture 12
• Firm will choose the level of quantity at which MR=MC
• Short-Run Supply Curve: Portion of the MC Above AVC
• Long-run equilibrium price equals min(ATC) and equilibrium profit is zero
• Monopoly represents an extreme market structure with a single seller
• Two market structures that lie between perfect competition and monopoly are
oligopoly and monopolistic competition
COR2100 60
Group presentation
• Teams 7 and 8
• Email presentation slides to discussant team and upload into Assignments at
least 48 hours before presentation
• Teams 3 and 4
• Be prepared for 5 mins discussion and comment
COR2100 61

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Difficulty level:

More Market Structures 30 mins

Where are we?

What is a perfectly competitive market?

• The industry is fragmented: Many firms and many buyers

• No restrictions on entry into the market: Free entry

Example: Catfish Farming Industry in US

• The industry is fragmented: Over 1000 catfish farms

• The product is homogeneous

• Perfect information about prices: Just google it!

• Production technology is well understood

Short Run vs. Long Run (Key differences)

• In the short run:

• In the long run:

Roadmap of the Short-Run Analysis

• Step 1: Profit-maximizing output

• Step 2: Construct individual firm’s supply curve

• Step 3: Construct market supply curve

• Step 4: Short-run equilibrium: Market demand=market supply

Profit and Revenue

• Profit=total revenue-total cost

• Total revenue (P☓Q)

E&S Cheeseman (Perfectly competitive)

• Market price is $1.13 per cheese box packed

Example: E&S Cheeseman

1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13

Discussion Question: Calculating Marginal

Marginal Analysis and Supply Decision

• If MR > MC: Profit increases if output increases

• If MR < MC: Profit decreases if output increases

• If MR = MC: Profit is maximized

Step 1: Profit-maximizing output

Firms choose the quantity

Discussion Question: Profit-maximizing

Is it true for all prices?

Think about it…

• With economic loss, what could the firms do?

• Firms will shut down as long as there is an economic loss?

Should Tea Party open on Sunday?

Temporary Shutdown Decision

• In the short run, the firm has to stay in the market

• Produce something or shut down?

• Minimizes the firm’s loss

•Economic loss = TFC + TVC  TR= TFC + (AVC  P) x Q

• Produce something or shut down?

• If shut down, loss=_______, if produce, loss=_________________

• Shutdown as long as ________________________

Shut Down Decision

Is it true for all prices?

For P>min AVC

Short-Run Supply Curve: Portion of the MC Above

Where are we?

• Step 1: Profit-maximizing output

• Step 2: Construct individual firm’s supply curve

• Step 3: Construct market supply curve

• Step 4: Short-run equilibrium: Market demand=market supply

Step 3: Market supply curve

• Total quantity supplied by all firms at each price

From individual supply to market supply

• If shut down, loss=_, if produce, loss=___________