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What is a Market?
Market( 市場 ) is a system governed by a set of rules or customs( 習俗 ) under which a well-defined good is exchanged.
Foreign exchange market, stock market
Food Market
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Four types of market
MonopolyMarket 完全壟斷
Oligopoly Market 寡頭壟斷
MonopolisticCompetition Market 壟斷性競爭
Perfect Competitive Market (Price-taker)受價者市場
Two extreme cases
Imperfect competitive Market (Price-searcher 尋價者市場 )
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Price-taker’s market ( 受價者市場 ) or(perfectly competitive market 完全競爭巿場 )
• A price-taker( 受價者 ) who cannot affect the market price and hence it must take whatever price that the market determines.
• Note: Because each seller only provides an insignificant part of the total market supply of some homogeneous goods ( 同類 / 同質的貨品 )
DefinitionDefinition
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Conditions of a Price-taking Market
1. A large number of sellers who are small in the market share 市場估有率 (relative to the market quantity).
2. Homogeneous goods ( 無異物品 ) are goods that are completely identical. E.g. no brand name, no advertisement. Any firm selling at a higher price would lose all its customers.
3. Perfect information; no transaction costs: buyers know the price charged by each sellers, no buyers would buy an identical product from sellers charging a higher price.
4. Free entry and exit: If market composed of a large number of small buyers and sellers, no one has the power to restrict the entry or exit of others
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Violation( 違反 ) of conditions
If any one of the first three conditions is violated, the market becomes price-searching ( 尋價者市場 ).
A market with only one seller is aA market dominated by a few large sellers is
anA market with a large number of small sellers but selling
heterogeneous goods or having imperfect information is a
monopoly ( 完全壟斷 ).
oligopoly ( 寡頭壟斷 ).
monopolistic competition. ( 壟斷性競爭 )
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Price-searching Market
Monopoly完全壟斷
Oligopoly 寡頭壟斷
Monopolistic competition 壟斷性競爭
尋價者市場
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Short Run Model of a Price-taker 受價者市場
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A Price-taker facing a horizontal Demand CurvesWhy?
Individual consumer demand curve
price-taker market/industry A price-taker
D1
P
Q=10
D
S
Q=10000
P1
*use the interception D and S to determine the market price at P1
*a price-taker do not have power to change P1
PP
Q=30
+ +
(ΣD)
(ΣS)
P1=d=horizontal demand curve
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A horizontal Demand Curve Facing a Price-taker (seller).
A. Horizontal demand curve: Reason: A price-taker cannot
influence the market price. If it charges a higher price, as market information is perfect and exists a large no.s of sellers supplying identical goods, it will lose all its customers. Quantity demanded drops to zero.
The demand is perfectly elastic A price-taker can sell whatever
quantity at the
Individual / A price-taker
P
Q
P1
0prevailing market
price ( 主要市場價值)
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Questions for discussion
Q2 “As the demand curved faced by a price-taker is horizontal, the market demand curve, which is the horizontal sum of all individual demand curves, must also be horizontal.” Discuss.
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Q2: Ans.
No, The market demand curve is the horizontal sum of
demand curves of all the consumers, not the horizontal sum of demand curves faced by all the price-takers.
Price-taker are not the buyers Price-taker are sellers. By the law of demand, as demand curves of
consumers are downward sloping, the market demand curve is also downward sloping.
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Marginal revenue (MR)&
Average revenue(AR)of a Price-taking firm
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(1) Equations Review
Revenue( 收入 ):
1. Total Revenue( 總收入 )=P*Q or AR*Q
2. Average Revenue=TR/Q
AR=P x Q
Q AR=P Marginal Revenue:( 邊際收入 )
1. MR= ▲TR/▲Q
or = (TR2-TR1) /(Q2-Q1)
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P Q Total Revenue(TR)
Marginal revenue (MR)
$5 10
$5 15
$5 20
$5 25
$5 30
Average revenue (AR)
Fill in the table
= P x Q
$50
$75
$100
$125
$150
$5
$5
$5
$5
$5
$5
$5
$5
$5
$5
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Explain the relationship between MR, AR and d curve
Price-taker cannot influence the market priceOutput is sold at the prevailing market priceSo the marginal revenue(MR) and average
revenue(AR) are equal the market price.
Conclusion:
P=MR=AR=demand curve
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HKALE MC 98.29
Q.The demand curve facing a price-taker is perfectly elastic. This implies that
A. The market price will not change.B. The law of demand cannot be applied in the
price-takers’ industry.C. The market price will not decrease even
when a seller increases his output.D. All of the above
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HKALE MC98.29
Answer: C
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Example of a perfect competition Market (P-taker)?
In reality, no firm like perfect competition market. The very close one like is Gold Market.
(1) abundant buyer and seller
(2) Homogenous Goods e.g. 9999 gold bar
(2) Freedom of entry and exit the market
(3) It is easy to find information about the quantity and price in the market. But information is costly to obtain which is not a perfect information.
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Is there any market can fulfill ALL the condition of P-taker model in our economy?
No
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The conditions of p-taker’s market are not realistic. Is it still useful?
The model is still useful Use ideal( 完美 ) situation as a standard( 標準 )To analysis( 分析 ) competition in the real
world.Evaluate( 評估 ) and compare the efficiency of
other market structure.
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(2) Equations Review:Cost ( 成本 ): ( 總成本 )TC=TVC+TFC --------------------------------(1)
=Average Cost*Quantity ( 總可變成本 )TVC=AVC*Q----------------------------(2)
= Average Variable Cost*Quantity ( 總固定成本 )TFC=AFC*Q-----------------------------(3)
= Average Fixed Cost*QuantityMarginal Cost ( 邊際成本 ):MC= ▲TC/▲Q = --------------------------(4)(TC2-TC1)/ (Q2-Q1)
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(3) Equations Review
Profit=TR-TC ( 利潤 = 總收入 - 總成本 )
= Total revenue - Total Cost If profit =0 (normal profit or Breakeven) If profit =+Ve economic profit If Profit = -Ve Loss
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Determination of a wealth maximizing output
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Wealth-maximizing output of a P-taker ( 受價者市場 )
P
Q
MC
MR=P*=AR=d curve
Q’ Q*
P*
before Q’ MC>MR Loss
Between Q’ & Q* MR>MC Gain∴
At Q*, MR=MC Marginal Revenue can cover its marginal cost
MR>MC, you have to decide if the gain can cover the loss before Q*. Max-wealth at Q*, when MR=MC
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Q5 (a) At Q’, MR=MC. Explain why it is not wealth-maximizing?
(b) At Q*, MR>MC. The marginal gain is zero. Explain why it is wealth-maximizing?
Questions for Discussion
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Q5 Ans.: (a) & (b)
(a) At Q’, MR=MC it is wealth-minimizing. Because MC curve
cuts MR curve from above. At Q’, MC>MRLoss.
(b) At Q*, MR>MC marginal gain is positive, more units would be
produced even very small gain.MC curve cuts the MR curve from below at which marginal equal to zero.
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In short run: the no.s of firms is fixed. TC=TVC+TFC Maximizing-wealth output at MR=MC P or AR≧ AVC ( 收入≧可變成本 ) E.g labour
wage, monthly rent, water fees..etc.
Short Run of a P-taking Model
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SHORT-RUN OUTPUT DETERMINATION OF A PRICE-TAKER
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MCP
Q
AVC
ACP1
MR=AR=P1=d
Q1
AC1
Profit
Case A) In short-run, a price-taking firm is earning an
economic profit (P>AC) ref. P.158(4)
At P1: MR = MCProduce at Q1
Total Revenue = P x Q
Area =
Total Cost = AC x Q
Area =
Profit per unit =P-AC =
Total Profit = (P – AC) x Q
Area=O
A
BP1AQ1O
AC1BQ1OAB
P1ABAC1
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Case B) In short run, a Price-taker firm is earning a normal profit (Breakeven), if P=AC
ref. P.157(3)
MCP
Q
AVC
AC
P2 MR=AR=P=d
Q2
AC2=
At P2: MR = MCProduce at Q2
TR = P x Q
=
Total Cost = AC x Q
=
Since P = AC
Profit per unit =P-AC =
Total Profit = (P – AC) x Q
=
P2 CQ2 O
O
C
AC2CQ2O
0
0
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Case C) In short run, a Price-taker firm, continuing production, if P>AVC but not cover the AFC
ref. P.157(2) MCP
Q
AVC
AC
P3MR=AR=P=d
Q3
AC3
At P3: MR = MCProduce at Q3
TR = P x Q
=
Total Cost = AC x Q
=
Since AC>P
Loss per unit AC - P =
Total Loss = (AC - P) x Q
=
P3 EQ3 O
O
D
AC3DQ3O
DE
Loss
AC3DEP3
E
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Case D) In short run, a Price-taker firm is suspending production immediately, if P<AVC
ref. P.157(1)
MCP
Q
AVC
AC
P4
MR=AR=P=d
Q4
AC4
At P4: MR = MCProduce at Q3
TR = P x Q
=
Total Cost = AC x Q
=
Since AC>P
Loss per unit AC - P =
Total Loss = (AC - P) x Q
=
P4 GQ4 O
O
F
AC4FQ4O
FG
Loss
AC4FGP4
G
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Short Run Supply Curve of a P-taker
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Short Run Supply curve of a P-taker
The S.R. supply curve:
1. Q* at MC=MR
2. P greater than or equal to AVC in Short Run.
3. The supply curve coincides with the MC curve.
Q
AVC
AC
MR=AR=P*=d
Q*
PMC
P*
S.R. supply curve of a P-taker’s
Min AVC
TR=TVC
P-taker’s supply curve
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The market equilibrium Price (Peq)
+…+
+…+
Q Q
QQQ
PP
P P
P
P*
Individual A’ Individual B’
Firm A’ Firm B’
Market/Industry
Q*
D(=Σd)
S(=Σs)
Peq is determined by the intersection of market D and S
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Long Run Model of a P-taker
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Long Run Model(L.R) of a P-taker L.R, Freedom of entry and exist L.R, TC=TVCL.R, max-wealth output at MR=LRMC,
P or AR LRAC≧ ( 收入≧總成本 )Profitnew firm entry (S↑) supply curve to the right
forcing P↓until Profit =0
D
SS’
P↓
Q
P
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Long Run Supply Response: If P>LRACProfit existEntry of new firm
QQ*
AC2
P*
P
LRAC
LRMCP
Profit (1)MR=P=AR=d
Individual P-taker firm
D
S
S’
P1=AC2
(2)
P-taker market
TC=TVC MR=MC
Profit is a signal for entry of new firms in L.R.
Forcing Price↓until the profit = 0. Then no more new firm entry
New firm entry(S↑)
(3)
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Long Run (1) Entry of new firms: When P>LRAC
In Long run, if P>LRACProfitSupplyPrice until profit fall toFinally, all firms just earn profit in the
long run. (Breakeven)
S ↑P↓ zero.
normal
new firm entry
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Long Run (2) Exit of firms: When LRAC>P
QQ*
AC2
P*
LRACLRMC
Individual P-taker firm
D
SS’
P↑
P-taker market
MR=MC
Loss is a signal for exit of existing firms in L.R.
S↓ Forcing P↑, the P< LRAC. no more firms exit∴
New firm exit (S↓)
(3)
(2)
TC=AC ＊Q
Loss(1)
P
P
Q
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Long Run: (2) Exit of firms
In L.R.: If LRAC>PLoss occurSupply Price driving marketFirm , only the firm who has a
lower LRAC can survive
(S ) Supply curve to the left
PExit
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(2) No entry and exit: When P=LRAC
QQ*
P*=AC
LRAC
LRMC
Individual P-taker firm
D
SP-taker market
MR=MC
Zero Profitin L.R.TR just cover TC and earning no more than their highest-valued alternative.(Breakeven)
Profit = 0 no firm entry or exit
TC=AC ＊ Q =TR=P* ＊ Q*
P
P
Q
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Why Profit is Zero in the Long Run
MCP
Q
PAC
AC’AC ↑due to the increase in factor price, raising the firm’s total cost
AC1
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Under ‘competitive conditions’ always pressure on
Profit exists
S output in the industry price of the good move an existing firm’s total
revenue
Factor price total cost Profit is squeezed from above and from below
firm will enter the marketshare the existing profit
increase expand
downward
Profit
Lowering increase increase
Why Profit is Zero in the Long Run?
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How profit is eliminated by an increase in factor price?
Factor price Cost of ProductionIn reality, factors of production are
heterogeneous. Different firms produce with different production cost.
In long run, market price of good to the minimum point of the LRAC curve (marginal firm) firm’s with superior factors by offering extra payment (imputed rent)
increase increase
Fall
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Distinguish between three types of firm
1. Marginal firm or fringe firm
2. Intra-marginal firm
3. Extra-marginal firm
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Marginal firm (P=AC)
With the highest average cost curveLowest productive power or efficiencyOnly cover its full costs (TVC+TFC)Earn only negligibly more within the
industry than outsideFirst to leave the industry if the price
increase
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Marginal firm (P=AC)
MC=MR
P=d=AR=MR
AC
P*Q*=AC*Q*
TR=TC
Just cover its full cost
MC
P=AC
Q*
Q
P
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Intra-marginal firm (P>AC)
Earning an amount of rent in excess of the initial cost of fixed factor (TR>TC)
Lower cost in the industry (P>AC)Poor alternative elsewheresurvive at a lower priceOnly a larger fall in price will force it to
exit
profit
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Intra-Marginal firm (P>AC)
Profit: Earning excess of initial cost
P
P1
Q*
AC
MC
Q
AC1
TC
Profit P=MR=AR=d
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Extra-marginal firm(AC>P)AC>P
AC>PThe firm has a higher costBetter alternative elsewhereSo it is not enter the industry
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P
Q
MC
AC
P1
Extra-Marginal firm(AC>P) Loss, not
enter the industry
P=d=AR=MR
Total Cost
AC1
Q1
Loss
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Q: Explain why in a competitive industry like farming, some farmers are able to earn a much higher income than other competitors?
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Ans.
First comers of the industry are able to earn a much higher income.
They usually own more fertile lands and save other variable costs. E.g. costs of pesticide of fertilizer.
Late comers, earn less income. E.g. lands are usually poorer quality and higher variable cost
Late comers can only incomes close to or equal to the costs of providing other inputs.
They earn smaller amounts of rents, or even no rent at all.
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Review
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Short Run Model (S.R.)≠ Long Run Model(L.R)
L.R, Freedom of entry and exist L.R, TC=TVCL.R, max-wealth output at
MR=LRMC, AR LRAC≧ ( 收入≧總成本 )
Profitnew firm entry (S↑) P↓until Profit =0
D
SS’
P↓
QDD’
S
Q
P↑
P
S.R, the no. of firms is fixed.
S.R, TC=TVC+TFCS.R, max-wealth output at
MR=MC, AR≧ AVC ( 收入≧可變成本 )
Price↑(caused by D↑) induce the existing firms to produce more and enjoy profit.
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Wealth-maximizing Output of a P-taker firmin S.R and L.R.
P
Q
MCAC
AVC
MR=AR=P1=d curve
SR-Q*
MR=AR=P2=d curve
Q*-LR
P2
P1 1.MR=MC Maximize wealth output
2.S.RP AVC Produce≧ ∴
1.MR=MC
2.L.RP AC ≧Produce∴
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Vilfredo Pareto identified a condition of resource allocation p.154
Which is now know as the Pareto condition.
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The meaning of Pareto Efficiency in Allocation
Definition: A state where it is no longer possible
reallocate the use of resources so that one individual will gain without loss to another.
P
Q
MC
P* MR=AR=P=d
Q*
P = MR=MC=MUV
P-taker model
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Functions of Pareto Efficiency
1. The Pareto condition forms the basis for an evaluation of the efficiency of resources allocation.
2. If the market is not function well, it may not attain the Pareto EfficiencyMarket failure
3. Government intervention is called for to correct this situation.
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Resource Allocation Efficiency
1) Production Efficiency: Revenue cover the cost:P = MC
2) Consumption Efficiency: P=MUV, the market price is equal to the marginal use value
3) Allocation Efficiency: P =MC =MUV
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It is no longer be possible to ↑or↓output to improve social welfare.P
Q
MC
P* MR=AR=P=d Curve
Q*
Efficiency in Resource Allocation (P=MC=MUV)
↑or↓ output will decrease social welfare.
Social cost > benefit∴
P=MC=MUV
Q1
dead weight loss
dead weight loss
Q2
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Pareto condition in Price-taking Market
In a perfectly competitive market, the coordination of
production is not the role of aThere is an in the marketWhich coordinates
And to achieve the maximum for the whole economy
single individual
‘invisible hand’
consumption, production, and allocation
benefit
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Economics notes & past paper collection
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