Lecture 5. Topic 5 Market models – I Fundamentals of Economic Theory Yevgeniy M. Orel, C.Sc.(Econ.), Docent, Faculty of Economic Science, NaUKMA

Thursday, July 23, Outline of the presentation (Topic 5) Markets: definitions, types Purely competitive market Demand for a competitive sellers product Profit maximization in the short run and in the long run Pure competition and the market efficiency Pure monopoly. Monopoly market Natural monopolies Monopoly demand Economic effects of the monopoly market

Thursday, July 23, MARKET, definitions: A group of buyers and sellers of a certain good (commodity or service); A place where they – buyers and sellers – get together; A system, network, infrastructure, etc. conducive to market transactions; Other definitions…

Thursday, July 23, Markets work through interrelationship of supply and demand. Factors of production are owned by households and purchased by firms (business entities) for producing goods to be sold to households/consumers.

Thursday, July 23, Markets, more Types of markets: –Product market –Resource market –Labor market Participants in the markets: consumers, producers, entrepreneurs,

Thursday, July 23, Markets characteristics: Trading of goods (physical goods and services) Two independent parties Prices relate to value of goods: –Buyers ability and willingness to pay = demand ; –Sellers/producers ability and willingness to sell/produce = supply Interaction of demand and supply.

Thursday, July 23, Purely competitive market Very large number of suppliers Suppliers are price-takers Standardized (homogenous) product No non-price competition Easy entry to [and exit from] the market

Thursday, July 23, Demand for a competitive sellers product In the conditions of the pure competitive market the demand for a single producers product is very close to absolute inelasticity. A single suppliers demand curve is horizontal in the short run. The competitive market demand curve is descendant.

Thursday, July 23, Profit maximization in the short run and in the long run Profit maximization in the short-term can be measured in two ways: –TR-TC approach; –MR-MC approach.

Thursday, July 23, Total-revenue-total-cost (TR-TC) approach 1.) Profit maximization – TR exceeds TC. TR less TC equals to Economic Profit; 2.) Loss minimization – TC exceeds TR, the total loss does not exceed FC. In this case it is cheaper to continue the business operation than to stop it; 3.) Close-down – TC exceeds TR, the total loss exceeds FC. In this case the supplier ought to suspend producing, since it will be cheaper to produce zero units than any at all.

Thursday, July 23, Marginal-revenue-marginal-cost (MR-MC) approach Profit is maximized in the point in which MR and MC curves cross. Losses are minimized in the point in which MR and MC curves cross.

Thursday, July 23, Pure competition and the market efficiency Allocative efficiency: P=MC Productive efficiency: P=AC

Thursday, July 23, Pure competition is not equitable due to: 1.) inability to ensure an equitable distribution of income; 2.) inability to resolve the issues related with market failures; 3.) inability to ensure the efficient use of production techniques; 4.) inability to satisfy consumers with a sufficient range of choice.

Thursday, July 23, Pure monopoly MONOPOLY – in a broader sense – one or more firms have a market power; MONOPOLY – in a narrower sense (pure monopoly) – a market situation when there is one and the only one supplier.

Thursday, July 23, Pure monopoly market A single supplier Unique product Significant control over price Blocked entry for competitors Public relations advertising as a means of non-price competition

Thursday, July 23, Monopoly market Legal barriers Ownership of essential resources Economic barriers Unfair competition

Thursday, July 23, Natural monopolies Natural monopolies emerge in the fields where a competition is impossible, unreasonable, or inexpedient. E.g.: public utility companies like water stations, natural gas suppliers, etc.

Thursday, July 23, Monopoly demand The demand curve for a pure monopoly firm is descendant, since the demand for the monopolists product is equal to that for the total product: The monopolist is the only supplier. The monopolist is a price-maker.

Thursday, July 23, The monopolist is a price-maker.

Thursday, July 23, Profit maximization, monopoly The monopolist maximizes its revenues at the point MR=MC. The optimal quantity of output corresponds to the point of MR and MC curves intersection. The price is on the D-curve, right above the MR=MC point.

Thursday, July 23, Economic effects of monopoly Insufficient output, misallocation of resources; Economies of scale drive competitors out; X-inefficiency; Sufficient resources for implementation of advanced technologies; Legal rights protection raises costs; Price discrimination.

Thursday, July 23, Дякую за увагу! Thank you for attention!