P.14-18. Imperfect & Perfect competition and profits + costs, p.200.

Aims:

1.     Profit maximisation

2.     Market domination (sales maximisation)

3.     Corporate growth (by expanding, diversifying and take-overs)

4.     Satisfying profits (sufficient)

Types of competition:

1.         Perfect competition (agriculture, stock exchange)

Organisation is a price taker.

1.     A large no. of buyers and sellers.

2.     Consumers aim to maximise satisfaction.

3.     Producers aim to maximise profits.

4.     All firms sell a homogeneous product.

5.     There is a perfect knowledge.

6.     All the factors of production are perfectly mobile.

7.     There is free entry to and exit from all markets.

Supply = MC (above  AVC), Industry  supply = sum of ind. supplies. Abnormal profit is  windfall Profit. So long as the price is above AVC the business will MAXIMISE its profits by producing the output at which: MC=MR=P=AC=AR=MU.

2.         Monopolistic competition (clothing and furniture).

Many producers and product differentiation. Frequent entry and exit.

Adv of product differentiation

1.     more choice

2.     non price offers

3.     perceived quality

4.     stable markets and prices

3.         Oligopoly (Cars)

Few sellers, product differentiation. Barriers to entry.

Oligopoly behaviour

1.     game theory

2.     price stabilit

3.     non-price competition

4.     stabilised market shares

5.     price leadeship and collusion

6.     shock induced price wars

4.         Duopoly

Two sellers, like oligopoly.

5.         Pure monopoly (sugar (Tate and Lyle), electrical car components)

Only one seller (or >25% of the market). No close substitutes + barriers. Profit maximised when TC and TR are furthest apart (not in max. TR). 2MR=AR.

Demand is elastic if MR is + ive.

1.     Natural (South-Africa on diamonds)

2.     Historical (firm was the first, Lloyds on insurances)

3.     Capital size (if much needed, monopoly is best, chemical industry)

4.     Technological (many economies of scale, cars)

5.     Legal (patents, to encourage new ideas)

6.     Public (post offices)

7.     Contrived (arranged, legislation is against)

Policies against:       

      Prohibition                       Take-over              Regulation

Price discrimination

Monopolist must be able to separate the markets + the market elasticities must be different.

Types

      Geographical                  Branding               Time              Dumping

Costs:

     Explicit costs- firm is contracted to pay (wages, electricity, interest etc.)

     Implicit costs - not so obvious (interest for money invested, owners' salary, depreciation).

Total, Variable and Fixed cost (only in short run). Average total, variable and fixed (declines).

Firm will stay in business until it can cover its variable costs. (p247)

Resale price maintenance was made illegal (RPM), by Office of Fair Trading.

Also the EC have the restrictions on trade practices made by the Treaty of Rome. The mark-up prices and break-even charts are used to determine the right price. Policy is to make AC=AR.

Advantages	Disadvantages
1.     Flat bottomed AC (ec. of scale, cars) 2.     Research and development	1.     Redistribution of income 2.     Allocative inefficiency (misallocation) 3.     Lack of X-efficiency (minim. of costs)