IE 2

Slide 1: 

Imperfect Competition Arnela Mustafić 70035

Content: 

Content Economies of Scale Markets Defining Theory of imperfect competition Monopolistic competition Monopolistic competition and Trade

Economies of Scale: 

Economies of Scale

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Internal Economies of Scale Average cost of production decreases the more output it produces

Perfect competition: 

Perfect competition Many buyers and sellers Price takers (no one is large part of the market) Example: Wheat farmer Imperfect competition Only few major producers of a good or differentiated production Influence on the price Sell more only if price decreases Example: Boeing & Airbus Markets

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Modeling imperfect competition

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The extra revenue the firm gains from selling an additional unit Marginal revenue Its curve, MR , always lies below the demand curve, D . In order to sell an additional unit of output the firm must lower the price of all units sold (not just the marginal one). The relationship between marginal revenue and price depends on two things: How much output the firm is already selling The slope of the demand curve It tells us how much the monopolist has to cut his price to sell one more unit of output.

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D Cost, C and Price, P Quantity, Q Monopoly profits AC P M Q M MR MC AC Theory of Imperfect Competition Profit-maximizing firms set marginal revenue equal to their marginal cost, c .

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Average cost Marginal cost 1 2 0 3 4 5 6 2 4 6 8 10 12 14 16 18 20 22 24 Cost per unit Output When average costs decline in output, marginal cost is always less than average cost. Theory of Imperfect Competition

Monopolistic competition: 

Monopolistic competition

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A special case of oligopoly (There are several firms, each of which is large enough to affect prices, but none with an uncontested monopoly) Two key assumptions: able to differentiate its product from its rivals. take the prices charged by its rivals as given. Equation for the demand: Q = S x [1/ n – b x ( P – P )] Monopolistic competition

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PP Cost C , and Price, P Number of firms, n CC P 3 AC 3 n 3 n 1 AC 1 n 2 AC 2 E P 2 , P 1 Monopolistic competition The downward-sloping curve PP shows that the more firms, the lower the price each firm will charge. The upward-sloping curve CC tells us that the more firms there are, the higher the average cost of each firm.

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Monopolistic competition

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Monopolistic Competition And Trade

Monopolistic Competition and Trade: 

Cost C , and Price, P Number of firms, n CC 1 n 1 P 1 1 PP n 2 P 2 2 CC 2 Monopolistic Competition and Trade

Monopolistic Competition and Trade: 

Gains from an Integrated Market Monopolistic Competition and Trade

Monopolistic Competition and Trade: 

Assumptions : There are two countries: Home (the capital-abundant country) and Foreign. There are two industries: manufactures (the capital-intensive industry) and food. Neither country is able to produce the full range of manufactured products by itself due to economies of scale. Monopolistic Competition and Trade Economies of Scale and Comparative Advantage

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Home (capital abundant) Foreign (labor abundant) Manufactures Food Monopolistic Competition and Trade

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Home (capital abundant) Foreign (labor abundant) Manufactures Food Interindustry trade Intraindustry trade Intraindustry trade = The exchange of manufactures for manufactures Interindustry trade = The exchange of manufactures for food Monopolistic Competition and Trade

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Monopolistic Competition and Trade Gains from intraindustry trade will be large when economies of scale are strong and products are highly differentiated.

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Thank You for your attention! RNELA