QuestionsChapter 6: The Theory and Estimation of Production Equipped with the theories of...

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QuestionsChapter 6: The Theory and  Estimation of Production Equipped with the theories of production, cost and profit maximization for a single firm, we can investigate how  competitive market conditions within an entire industry influence a firm’s  prices, output and profitability.  In Chapter 10, we examine two important industry-level market structures:  Pure (“Perfect”) Competition  Monopolistic Competition In addition, we explore McGuigan’s framework for Competitive Strategic Analysis. 1 Chapter 10 - Prices, Output and Strategy:  Pure and Monopolistic Competition 2 Chapter 10: Fundamental Concepts and Terminology Relevant Market – The collection of individual firms who produce and sell competing products to consumers within an entire industry. These firms interact with each other in buyer-seller relationships. Market Structure – The product, price and competitive inter-relationships between individual firms in a relevant market. 	Four major elements of market structure are: The number and relative size of firms in the industry. The similarity of firms’ competing products sold within the industry; this is known as the degree of product differentiation. The extent to which the decision-making of individual firms is independent, and not interdependent or collusive. The conditions (ease or difficulty) for new firms to join an industry (“entry conditions”), or for established firms to leave an industry (“exit conditions”). 3 Chapter 10: Fundamental Concepts and Terminology Variability in Market Structure Fragmented Market – A relevant market where there are a large number of relatively small firms. The four largest firms in a fragmented industry will constitute less than 10% of the sales for the entire relevant market. Concentrated Market – The combined total sales of the four largest firms in the industry constitute a majority of the sales for an entire relevant market. Consolidated Market – Through mergers, acquisitions and/or buyouts, a fragmented market evolves to become a more concentrated market (fewer firms, each relatively larger in size).  4 Chapter 10: Fundamental Concepts and Terminology Continuum of Market Structures – Economists identify four primary competitive market structures: Pure (Perfect) Competition Monopolistic Competition Oligopoly Monopoly Levels of Economic Profit and Relevant Market Effects Recall definition of Economic Profit: Total Economic = Total       ─    Total Explicit   ─    Total Implicit Profit (TEP)          Revenue         Cost                         Cost Normal, Above-Normal and Below-Normal Total Economic Profit If  TEP = 0, then TEP is normal. TEP covers opportunity cost. If  TEP > 0, then TEP is above-normal. Firms enter industry, if they can. If  TEP  Average Total Cost (ATC) When P > ATC, then TP > $0, and we say that TP is “above normal”. $Price per unit of Output or $MC  Or $ATC Q* for Total Profit Max	  $Marginal Cost ($MC) $Marginal Revenue = $Product Price                        (MR)  = ($P) Maximize $Total Profit  where $Price = $Marginal Cost $Average Total Cost ($ATC) Quantity of Output (Q)	   $Product Price ($P) Maximum Total Profit (Since TP > 0, then it is above-normal)  $Average Total Cost ($ATC) Total Cost =  $ATC • Q* Total Revenue =   $P • Q* 12 In Pure Competition, we can illustrate the scenario where an individual firm temporarily earns a below-normal (negative) level of Total Profit (TP). The firm is taking a loss. In this scenario: Firm produces Q* where P = MC to minimize the total loss At Q*, Product Price (P)  0 (Above-Normal). Then Free-Entry causes an increased Industry Supply. Supply shifts right. When new Market Price 2 established, then $P2 = MC, and TP = 0 (Normal). $Price per unit of Output $Price per unit of Output Quantity of Output (Q) [100’s of Q]	  Quantity of Output (Q) [Million’s of Q]	  Entire Purely Competitive Industry One Small Purely  Competitive Firm  in the Industry Industry Supply 1 Industry Demand Firm’s Initial $Price 1 $P1=MC Industry Supply 2 $Price 2 Firm’s New $Price 2  $MC $ATC $Price 1 $P2=MC Q1* Q2* 16 The interaction of Costless Information, Free-Entry, Free-Exit and Total Profit levels in Pure Competition (Continued) When free-entry has increased the market supply sufficiently to cause the market price P to equal Average Total Cost (ATC), then TP drops to $Zero, and the free-entry of new firms stops because TP is simply “normal”. Since TP now equals its opportunity cost, there is no longer any extra motive for new firms to enter the purely competitive industry. Entrepreneurs now look elsewhere in the economy to see if “greener pastures can be found”. The Purely Competitive industry can stabilize where: Price = Marginal Cost Price = Minimum Average Total Cost What happens in Pure

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1.
a
1.
A monopolistic industry is one in which numerous businesses provide equivalent (but imperfect) replacements. Barriers to entry and leave are low in a monopolistically competitive business, and a firm's decisions do not have an immediate impact on competitors' decisions. Monopolistic rivalry is linked to brand differentiation as a business strategy. In monopolistic competition, firms are set or establish prices, rather than setters, as in monopoly. Their nominal pricing power, on the other hand, is effectively neutralized by the facts that demand for their product has high price elasticity. Companies must be able to differentiate their products from those of their competitors by enhancing their quality, reality, or perception in order to effectively raise pricing.
2.
A marginal sale for a monopoly fall as it sells more output. The marginal fee curve slopes upward. The profit-maximizing objective of a monopolist may be to distribute at a price where marginal revenue equals marginal cost. The firm produces a less output at point where MR > MC at the same levels of output, and the firm might make more money by raising output. When the firm produces more than it needs to, then MC > MR, and the corporation might earn more money by reducing its output.
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b.
Monopolies can generate tremendous profits over time. Profits are best when MC = MR, as they are in all businesses. In general, the degree of revenue is determined by the level of competition within the market, which is zero in the case of a natural monopoly. MC = MR at the profit-maximizing level, with production Q and price P. A supernormal profit is conceivable since price (AR) is higher than ATC at Q.
Profits are best when MC = MR, as they are in all businesses. In general, the degree of revenue is determined by the level of competition within the market, which is zero in the case of a natural monopoly. As a result, while a monopolistically aggressive business might yield favourable monetary earnings in the short term, the addition of more competitors decreases monetary earnings to zero in the long run. Keep in mind that a monetary profit of 0 equals a monetary profit of 0 in accounting terms. Zero monetary earnings imply that the company's accounting earnings are the same as what its resources can extra provide inside the following good utilization.
c.
The level of production at which the price matches the marginal cost (MC) of output is known as allocating efficiency. Buyers are willing to pay a price that is equivalent to the marginal utility they will obtain. As a result, optimum distribution occurs when the marginal usefulness of the good equals the marginal cost. Monopolies have the ability to raise prices above the marginal cost of production and are thus allocative inefficient. Monopolies do, in fact, have market power and may raise prices to diminish consumer excess.
d.
1) Production efficiency entails producing without waste so that the production potential frontier is attained. In the long term, the market price in a completely competitive market - owing to import and export - equals the long-run AVC minimum. To put it another way, everything is created and sold at the cheapest feasible price. Production is inefficient when the price is greater than the marginal cost but the average total cost is equal.
2)
Monopolistic competition occurs when a customer can only receive a certain sort of goods from a single manufacturer. To put it another way, there is product differentiation. Because of product differentiation, businesses suffer selling expenses. There are many vendors,

Chapter 6: The Theory and Estimation of Production Equipped with the theories of production, cost and profit maximization for a single firm, we can investigate how competitive market conditions within...

Answer To: Chapter 6: The Theory and Estimation of Production Equipped with the theories of production, cost...

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