The Four Market Models

The Four Market Models
How do businesses decide what price to
charge and how much to produce?
It depends on the character of its industry.
Classroom Concerns
Attendance Issues* 15 Limit
Assignment Completion
Four Market Models
Pure Competition
Pure Monopoly
Monopolistic Competition
They differ in the # of firms in the industry,
whether those firms produce a standard
product, how difficult it is to enter the industry.
Characteristics of Pure Competition
• Large Number of Firms competing (shares on
the stock market, farm products)
• Standardized Products (consumers are
indifferent if price is the same)
• Price-Takers (at the mercy of the market price,
they make up a fraction of total production)
• Free Entry and Exit from Industry (no
significant legal, tech, or financial obstacles)
Demand for a Purely Competitive Firm
• Perfectly Elastic Demand: The firm is a pricetaker, therefore, Marginal Revenue = Demand.
• It cannot obtain a higher price by restricting
output and it does not need to lower its price
to sell more, it just has to produce it.
• Figure 9-1 (217) shows the D, MR, and TR for a
perfectly elastic firm. (This is not for the whole
Average, Total, and Marginal Revenue
• Average Revenue: TR / Quantity Sold
• Total Revenue: Total dollars received from the
quantity sold
• Marginal Revenue: Change in total revenue
from selling one additional unit.
Test Question (Key Question # 3, Page 243)
Profit Maximization in Short-Run
• Since the Purely Competitive firm is a pricetaker, it can only adjust output to increase
• In the short-run, only variable resources can
be adjusted (labour and materials).
• To find the profit maximizing point, we must
compare TR and TC, or MR and MC.
Profit Maximization (TR-TC)
• The firm’s profit is maximized where Total
Revenue (TR) exceeds Total Cost (TC) by the
maximum amount.
• In Figure 9-2 (220) this is displayed in two
ways. One is utilizing both TR and TC curves
(note the two Break-Even Points). The other is
utilizing a total economic profit curve.
Profit Maximization (MR=MC)
• The firm can also compare Marginal Revenue
and Marginal Cost to maximize profit.
• The firm will keep producing more units until
Marginal Revenue is equal to Marginal Cost.
• For a purely competitive firm, Price = Marginal
Revenue, so P = MC for profit maximization.
• You cannot produce a fraction of a product.
Calculating Profit
• In Table 9-4 (222) Marginal Cost is still less
than Marginal Revenue at the 9th unit of
output. So that is where we stop producing.
• Total Cost = (ATC x 9)
• Total Revenue = (MR x 9)
• Profit = TR – TC
• Therefore: Profit = ($1179 - $880) or $299
Key Graph 9-3 Quick Quiz
Minimizing Losses
• If a firm is losing money, it should still produce
as long as it is cheaper than them paying the
fixed costs with 0 production.
• If MR exceeds Marginal Cost at a higher unit of
output, it should keep producing, but at a
smaller loss… As long as MR > Minimum AVC.
• If production adds more to revenue than it
does to cost, the firm is saving money.
Perfect Competition Handout
• Allocative Efficiency and Perfect Competition
• Complete the reading and the associated
• Be sure to pay attention to the supplementary
• Hand-in the associated questions tomorrow.

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