PERFORMANCE &

STRATEGY IN

COMPETITIVE

MARKETS
Production and Competitive Markets
JOECEL M. DAVID| BSAN S2-1
Table of Content
COMPETITIVE MARKET EFFICIENCY

MARKET FAILURE

ROLE OF GOVERNMENT

SUBSIDY & TAX POLICY

 WHY IS IT CALLED PERFECT

Competitive
COMPETITION?

Market

Competitive markets balance supply and

demand
Competitive markets maximize social

Efficiency welfare
 The difference between the price a

CONSUMER

consumer pays for an item and the price he

would be willing to pay rather than do

without it

SURPLUS
Consumer surplus is based on the

economic theory of marginal utility, which

is the additional satisfaction a consumer

gains from one more unit of a good or

service.
CONSUMER

SURPLUS
Consumer Surplus = 1,000 (quantity sold) x [$6 (the maximum willingness to

pay) – $3 (actual price)] x 0.5 (as it’s a triangle)

= 1,000 x 3 x 0.5

= 1,500
 The increase in the economic well-being of

PRODUCER

producers who are able to sell the product

at a market price higher than the lowest

price that would have drawn out their

SURPLUS
supply.

The difference between total revenues and

total costs
PRODUCER

SURPLUS
Producer Surplus = 0.5 x 400 x ($5 - $2)

= 600
 DEADWEIGHT LOSS PROBLEM
DEADWEIGHT
Any cost suffered by consumers or

producers that is not transferred, but simply

LOSS
lost.
Deadweight losses occur when market

PROBLEM
imperfections reduce transaction volume
CAUSES OF DEADWEIGHT LOSS

1. Price Ceilings

2. Price Floors

3. Taxation

4. Subsidies

5. Monopolies
 Structural Problems
Above-normal profits are unwarranted if they reflect the

MARKET

raw exercise of market power.

Failure occurs when competitive markets do not sustain
socially desirable activity.

FAILURE
Failure can occur in markets with few participants

Incentive Problems
Situation when competitive
Externalities create incentive problems due to

market outcomes fail to

differences between private and social costs or

efficiently allocate economic

resources. benefits.
A negative externality is unpaid cost
A positive externality is an unrewarded benefit
ROLE OF GOVERNMENT
How Government Influences Competitive Markets
Tax policy or regulation is efficient if expected benefits exceed

expected costs.
Fairness must be carefully weighed when social considerations bear

heavily.

Broad Social Considerations

Consumer sovereignty is an important benefit of competitive markets.
Public policy can control unfairly gained market power
Tax and regulatory policy limit concentration of economic and political

power
 SUBSIDY

Subsidy Policy
Government grants that benefit firms and

individuals

AND Tax Policy

TAX POLICY Fines and penalties that limit undesirable

performance