imperfect competition

Imperfect Competition

Assumptions Underlying Imperf Imperfect ect Competition

Assumptions Underlying Imperf Imperfect ect Competition

Demand Curve/ AR and Imperfect Competition Competition

Short Run Imperfect Competition MC

P P1 C1

w

AC

y

z AR = D

x MR

Q1

Q 

1. The AR AR Curve Curve is downw downward ard slopin sloping. g. The The MR curve curve slope slopess more more steeply downward downward than the AR Curve. Cur ve. This is because in order to increase sales, the firm must reduce Price 2. The poin pointt of prof profit it maxim maximisa isatio tion n is where where MC cuts cuts MR fro from m below, point x in the diagram.

Short Run Imperfect Competition 3. The firm firmss pric price e is det deter ermi mine ned d by the the pro profi fitt maximising rule giving a price of P1 and Cost of C1. 4. SNP’s are shown in the box P1, w, y, C1. They can be made in the short run due to freedom of entry and exit. 5. Unlik Unlike e Per Perffect ect Compe Competi titi tion on the the firm firm in Imperfect Competition is not operating on the lowest point of the AC Curve. In this diagram the firms average average cost is at point y while to be on the lowest point it should be at point Z

Showing an inward shift in the AR curve cu rve under Imperfect Imperfe ct Competition MC

P P1

AC

p2

D = AR 1 D = AR 2 MR

Q1

Q 

1. Entry Entry of New Firms Firms Caus Causes es the the AR curve curve to shift shift inwa inward rdss from from AR1 AR1 to AR2. 2. Incre Increase ased d Competi Competitio tion n Forc Forces es the firms firms D/ D/AC to to shift shift inwa inwards rds – loss of market mar ket share. share.

LR Equilibrium under Imperfe Imperfect ct Competition MC

P

AC

B

P1

A AR = D MR

Q1

Q 

Imperfect Imperf ect Competition in the Long run

Imperfect Imperf ect Competition in the Long run

Features Common to Imperfect Competition, Features Perfect Perf ect Competition & Monopoly in LR

Why is Imperfect Competition regarded as being wasteful of resources? 1.

Firms Firms do not not oper operat ate e at at the the lowe lowest st point point of the the Aver Average age Cost Cost Curve Curve at equilibrium as in Perfect Perfect Competition.

2.

Competitive Advertising Advertising (doesn’t take place in perfect competition) is a feature feature of imperfect imperfect competition and pushes up the Average Average Cost Curve as a whole

AC with Advertising

AC without Advertising

Short Question