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MARKET STRUCTURE
1
DEFINITIONS
Firm : an institution that buys or hires FOPs and organizes
them to produce and sell goods and services.
Objectives :
Conventional perspective :
1. Minimize cost and maximize profits.
2. Pay taxes
3. Corporate Social responsibilities(CSR)
charitable activities, sponsorships, provide
scholarships, etc
2
• Objectives :
Islamic perspective :
Overall objective is to seek mardhatillah and al
falah through :
3
1. Production of halal goods
2. Minimizing cost and reasonable profits.
3. Paying zakat and taxes
4. Corporate Social responsibilities(CSR)
: charitable activities, sponsorships,
provide scholarships, etc
MARKET STRUCTURE
Industry : A group of firms producing the
same goods and services
14
C) Marginal Revenue
It is an additional unit of income
received by a producer after selling
additional (one unit) of product.
FORMULA: MR = ΔTR/ΔQ
15
ANALYSIS OF REVENUE
• Split the market structure into 2 categories:
10 1 10 10 10
10 2 20 10 10
10 3 30 10 10
10 4 40 10 10
10 5 50 10 10
17
DIAGRAM:
Price
P=AR=MR=Dd
Quantity
18
TABLE: MONOPOLISTIC COMPETITION
AND MONOPOLY
P Q TR AR MR
10 1 10 10 10
9 2 18 9 8
8 3 24 8 6
7 4 28 7 4
6 5 30 6 2
4 6 24 4 -6
3 7 21 3 -3
19
DIAGRAM:
Price
P=AR=Dd
MR
Quantity
20
PERFECT MARKET
• Perfect Competition is a market consists of
large number of sellers(small firms)
• selling identical products,
• easy entry(no barriers) for the new firms to
join the market causes it to have no control
over price . As a result the price is constant
which is the determined by the industry.
• Perfect Competition is a price taker.
21
IMPERFECT MARKET
• Imperfect Markets consist of Monopolistic
Competition, Monopoly and Oligopoly
• The common characteristic is that control
over price in which from little control (MC) to
most powerful(Monopoly).
• As a result the price is not constant, i.e. The
higher the price the less goods sold
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CONCEPT OF PROFIT MAXIMIZATION
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TOTAL/AGGREGATE
APPROACH
The use of total cost and total revenue
Profit = TR – TC
24
TR – TC APPROACH (PERFECT COMPETITION)
• TR – TC approach
Quantity =8 Quantity
30
MC – MR APPROACH-(MONOPOLY/
MONOPOLISTIC COMPETITION)
Quantity (Q) P (RM) TR AR MR TC MC
1 10 10 10 10 9 9
2 9 18 9 8 15 6
3 8 24 8 6 19 4
4 7 28 7 4 22 3
5 6 30 6 2 24 2
6 5 30 5 0 27 3
7 4 28 4 -2 31 4
8 3 24 3 -4 36 5
9 2 18 2 -6 42 6
10 1 10 1 -8 49 7
DIAGRAM:
MC
Price
P=AR=Dd
MR
Quantity =5 Quantity
32
33
PROFIT MAXIMIZATION IN THE
SHORT RUN
• 3 TYPES OF PROFIT
* Super Normal Profit (economic profit)
AR > AC
* Normal Profit (breakeven)
AR = AC
* Subnormal Profit (loss)
AR < AC
34
PERFECT COMPETITION
Supernormal Profit
P/Costs
MC
AC
5 P=Dd=AR=MR
100 Q
35
CALCULATION
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (5 x 100) – (3 x 100)
= 500 – 300
= 200 ( positive profit = supernormal profit)
36
PERFECT COMPETITION
Normal Profit
P/Costs
MC
AC
5 P=Dd=AR=MR
100 Q
37
CALCULATION
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (5 x 100) – (5 x 100)
= 500 – 500
= 0 ( zero profit = normal profit/ breakeven)
38
PERFECT COMPETITION
Subnormal Profit
P/Costs
MC AC
5 P=Dd=AR=MR
Q
100
39
CALCULATION
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (5 x 100) – (7 x 100)
= 500 – 700
= -200 ( negative profit = subnormal profit)
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MONOPOLISTIC COMPETITION /
MONOPOLY
Supernormal Profit
P/Costs
MC
AC
P=Dd=AR
MR
50 Q
41
CALCULATION
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (5 x 50) – (3 x 50)
= 250 – 150
= 100 ( positive profit = supernormal profit)
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MONOPOLISTIC COMPETITION /
MONOPOLY
Normal Profit
P/Costs
MC
AC
P=Dd=AR
MR
50 Q
43
CALCULATION
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (5 x 50) – (5 x 50)
= 250 – 250
= 0 ( zero profit/ breakeven = normal profit)
44
MONOPOLISTIC COMPETITION /
MONOPOLY
Subnormal Profit
MC
P/Costs
AC
P=Dd=AR
MR
50 Q
45
CALCULATION
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (5 x 50) – (7 x 50)
= 250 – 350
= -100 ( negative profit = subnormal profit)
46
SHUT DOWN POINT AND SHUT DOWN IN THE
SHORT RUN
• Shut down point is the point reached when price (P) falls
to a level just allows the firm to cover the minimum
possible AVC.
47
PERFECT COMPETITION
a) At RM5 Price(P) > the minimum average variable cost, the losses
incurred is equal to fixed cost only
Continue production/shut down point
AC
Cost MC
AC= 7 AVC
AFC
P= 5 P=Dd=AR=MR
AVC= 3
AVC
100 Q
48
• If P > AVC, the losses incurred is equal to
fixed cost, AFC only (cannot pay a certain
portion of the rent but can still pay the
salaries of the workers, AVC) So the firm can
still continue its production.
49
PERFECT COMPETITION
a) At RM5 Price(P) equals to the minimum average variable cost,
the losses incurred is equal to fixed cost only
Continue production/shut down point
AC
Cost MC
AC= 7 AVC
AFC
P/AVC=5 P=Dd=AR=MR
AVC
100 Q
50
• If P = AVC, the losses incurred is equal to fixed
cost, AFC only (cannot pay the rent, AFC but
can still pay the salaries of the workers, AVC)
So the firm can still continue its production.
51
PERFECT COMPETITION
a) If price fall below RM5, the firm will shut down its
operation because losses are grater than fixed cost.
Shut down MC
AC
Cost
AVC
AC=7
AFC
AVC= 5
P= 3 P=Dd=AR=MR
AVC
100 Q
52
• If P < AVC, the losses incurred is equal to
fixed cost, AFC (cannot pay the rent) and also
variable cost, AVC (cannot pay a portion of
the salaries of the workers).So the firm should
stop its production/ shut down.
53
MONOPOLISTIC COMPETITION /
MONOPOLY
a) Continue production/shut down point
MC
Costs
AC
AC= 7
AVC
AFC
P=5
AVC =3
AVC P=Dd=AR
MR
50 Q
54
• If P > AVC, the losses incurred is equal to
fixed cost, AFC only (cannot pay a certain
portion of the rent but can still pay the
salaries of the workers, AVC) So the firm can
still continue its production.
55
MONOPOLISTIC COMPETITION /
MONOPOLY
a) Continue production/shut down point
MC
Costs
AC
AC= 7
AFC AVC
P/AVC=5
AVC
P=Dd=AR
MR
50 Q
56
• If P = AVC, the losses incurred is equal to fixed
cost, AFC only (cannot pay the rent, AFC but
can still pay the salaries of the workers, AVC)
So the firm can still continue its production.
57
MONOPOLISTIC COMPETITION /
MONOPOLY
b) Shut down MC
Costs
AC
AC= 7 AVC
AFC
AVC= 5
P= 4
AVC
P=Dd=AR
MR
50 Q
58
• If P < AVC, the losses incurred is equal to
fixed cost, AFC (cannot pay the rent) and also
variable cost, AVC (cannot pay a portion of
the salaries of the workers).So the firm should
stop its production/ shut down.
59
PROFIT MAXIMIZATION IN THE
LONG RUN
60
If in the short run firms in an industry is
making a SUPER NORMAL profit, due to
easy entry this will attract more firms to enter
the market, the size will get larger and finally
in the long run the profit shared by them will
fall until each of them will only receive a
NORMAL PROFIT. (effect of entry)
62
• Effect of exit
63
DIAGRAM:
MONOPOLISTIC COMPETITION LONG RUN PROFIT
• Effect of entry
64
DIAGRAM:
MONOPOLISTIC COMPETITION LONG RUN PROFIT
• Effect of exit
65
Monopoly
AC
P/AR
AC
P=Dd=AR
MR
Q Q
67
PRICE DISCRIMINATION
(A PRACTICE OF MONOPOLY)
Price discrimination is the selling of goods or
services of given quantity at different price to
different buyers.
There are three types of price discrimination:
(i) First Degree
occurs when a firm charges a different price
for a unit sold and charges each consumer the
maximum price that he is willing to pay for
each unit.
Example : auction
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(ii) Second Degree
Occurs when a products are grouped into
blocks and each block is charged at a different
price.
Example: bus fare, cinema ticket.
69
a) Seller must be a monopolist
d
D
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72
SWEEZY’S MODEL
• Oligopolist faces two demand curves
1) a firm’ s demand curve : dd
2) an industry’s demand curve : DD
Price
d dd is elastic
DD is inelastic
D Quantity
73
SWEEZY’S MODEL
Used to explain the kinked demand curve and
price rigidity in the oligopoly model
(mutual interdependence between firms)
Assumptions:
1. If the firm were to increase its price, other firms
will not follow (demand curve is elastic) in order
to gain the market share
2. If the firm were to reduce price, other firms will
follow to avoid losing the market share
(demand curve is inelastic)
• As a result the demand curve for
oligopoly consists of dd (higher price)
and DD (lower price) known as
KINKED DEMAND CURVE.
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KINKED DEMAND CURVE MODEL
MC2
E MC1
P*
b D=AR
Q*
MR
76
• To maximize profit : MR =MC
• Between a-b gap :
- fluctuation of MC does not effect the equilibrium
price or quantity.
- therefore MC is between MC1 to MC2, price
and
quantity remain constant ( P* and Q*)
-This explain the price rigidity.
E AC
26 MC
24
22
21
20 a
10 b P=Dd= AR
MR
78
a) The equilibrium output is 200 units and
the equilibrium price is RM 26
• Profit = TR – TC
= (AR x Q) – (AC x Q)
= (26 x 200) – (21 x 200)
= 5200– 4200
= 1000 ( positive profit = supernormal profit)
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