MARKET STRUCTURES

So on  the recent Monday , the class has ventured to the last topic of Microeconomics which is  Market Structures. We had go trough initial subtopic in the market structure to have better acknowledgement in the particular field.

Market structure

Definition:

1.  Market is a place where the buyers and sellers meet one another to transact business .
2. Market also be defined as an arrangement that facilitates the buying and selling of a product, service, factor of production or future commitment.
3. Market structure means the number and distribution size of buyers and sellers in the market of particular goods and services.

Profit maximization in perfect competition market.

Market equilibrium is achieved when the marginal cost equal to marginal revenue. Price is determined based on the average revenue. Prices are fixed in perfect competition, so marginal revenue is still the same result at a price.

MR=MC

P=AR=MR

Imperfect competition such as monopolistic, monopoly and oligopoly achieved  market equilibrium when marginal revenue equal with marginal cost. Price are differentiated based on quantity supplied.

MR=MC

P=AR

Types of profit possibilities:

•  Supernormal profit.

             The profit earned when total revenue is greater than total cost. It also realized when               the price is greater than average total cost.

               

•  Subnormal profit

Economic losses are the losses incurred because the price is lower than the average total cost or when total revenue is less than total cost.

• Normal profit

        Normal profit or breakeven is the profit necessary for a firm to stay in business. Normal         profits is when total revenue is equal to total cost and where no profit or loss is                       incurred.

Perfect competition market.

What is perfect competition markets ?

Market in which there are a large number of buyers and sellers, buying and selling the homogenous products at certain price levels. 

Characteristics.

A)   Large number of buyers

There are many buyers in the market but they cannot control prices. Price is fixed in the market through the forces of demand and supply. No matter how much has been purchased, price is always constants. Buyers are said to be price takers.

B)    Many sellers in the market

There are many sellers in the market. Like the buyers they too cannot control price. They are also price takers. Usually the sellers are small firms. The action of one firm will affect to the others firms. Example, if the sellers offers a lower price, then he will incur a loss, and if he sells at a higher price, there will be no demand. In simplicity, he is powerless in determining price but he can set the quantity he wants to sell.

C)    The product are homogeneous

The goods are homogeneous and not differentiated. They are identical. The consumer cannot differentiate whether the goods come from producer A or B or C.  Ads is totally absent in this market.

D)   Free entry to and exit from the market.

There must be free entry to and exit from the market. If the industry is making profits, then new firms will enter the market. No restriction is imposed.

E)    Perfect knowledge

Consumers and producers have perfect knowledge about the  market situation.

F)    Mobility of factors of production.

There must be mobility of factors of production. There are no barriers to mobility. Land has its own alternative uses.

G)   No transportation cost.

There must be no transportation cost. It is assumed that all firms are situated close to one another and are very close to the market.

H)   Independence in decision making.

There will be no external forces that will influence the decision of buyers and seller. They make their own decisions. 

Short run profit in perfect competition market.

In the short term, perfect competition market has three types of profit which is:

a)    Supernormal profit in perfect competition market.

•      The profit maximization occurs when marginal cost equal to marginal revenue.
• The firm earns supernormal profit when average revenue (AR) is greater than                 average cost (AC).
•      The shaded area (EABP) is shown the profit (supernormal profit) area.
•     Calculation:

TR=AR x Q

TR=P (x) x Q (y)

TR= xy

TC=AC x Q

TC=AC (a) x Q (b)

TC= ab

b)    Normal profit in perfect competition market.

•     The profit maximization occurs when marginal cost equal marginal revenue .
•     The firm earns normal profit when average revenue (AR) is equal with average cost     (AC). Price is equal at minimum AC, firm at breakeven profit.
•      So, the firm will get the normal profit because total revenue is equal with total cost.
•     Calculation:

     TR=AR x Q

              TR=P (x) x Q (y)
TR= xy

TC=AC x Q

         TC=AC (x) x Q (y)

                                                                TC= xy

Therefore ,

Profit= TR – TC

         =xy - xy 

=0

               =breakeven
                   =Normal profit

c)    Subnormal profit in perfect competition market.

• The profit maximization occurs when marginal cost equal marginal revenue.
•  The firm earns  subnormal profit when average revenue (AR) is less than average cost (AC).
• So, the firm will get the subnormal profit because total revenue is less than total cost.
•  The shaded (EPAB)is shown the subnormal profit (losses) area.
•    Calculation:

  TR=AR x Q

                                 TR=P (x) x Q (y)

                                 TR= xy

    

                                TC=AC x Q

                                TC=AC (x) x Q (y²)

                                TC= xy²

                                

                               Therefore ,

                          Profit= TR – TC

                                   =xy – xy²

                                   = -xy

                                   =losses

                                   =subnormal profit

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PRODUCTION AND COST PART II

Wednesday, 2 March 2016. On the second day of learning this topic, he give us a objectives that we need to know when we study this topic. 

Law of Diminishing Marginal Returns

The law of diminishing marginal returns is the law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee. It also can be explained with the help of a table showing the production of a firm.

Input (increase) , Output (increase) = rate (decrease)

Let us define the total product, average product and marginal product.

Total Product (TP)

Total Product (TP) is the sum total of output produced by all the units of a variable factor along with some constant amount of the fixed factors used in the process of production.

Average product (AP)

Average Product is the output per unit of the variable factor and be obtained by dividing the total product by the amount of that used. In this case, labor is used.

               

Average product = Total Product (TP)

                                 Total Labor (L)

Capital (K) can be also used and the AP formula will be as below.

               

Average product = Total Product (TP)

                                 Total Labor (L)

Marginal product (MP)

Marginal product is the change in the total product of that input corresponding to an addition or unit change in its labor. Marginal product is the additional to total product when one more unit of labor is employed.

Marginal product (MPL) = Changes in total product

                                            Change in total labor (L)       

              

If capital is used as a variable input, marginal product is calculate as below:

Marginal product (MPK) = Changes in total product

                                             Change in total labor (K)        

The table shows below the relationship between output and labor when the capital is fixed. The diagrams show the relationship between AP, MP and TP.

L (units of labor)	TP (Total Product)	AP(Average Product)	MP (Marginal Product)
1	50	50	50
2	90	45	40
3	120	40	30
4	140	35	20
5	150	30	10
6	150	25	0
7	147	21	-3

Relationship between total product (TP) and marginal product (MP).

When MP is increasing, TP will increase at an increasing rate. When MP is decreasing, TP will increase a decreasing rate. When MP is zero, TP is at a it’s maximum. When MP is negative, TP declines.

Relationship between marginal product (MP) and average product (AP).

When MP is above AP, AP is increasing. When MP is below AP, AP is decreasing. When MP is equals to AP, AP is at maximum.

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PRODUCTION AND COST

During 29thFeb, Sir Amir have teach us a new topic, which is Production and Cost. On the first day of learning this topic, he give us a really interesting and objectives that we need to know when we study this topic. During that day, we studied the definition of production, short run and long run production and also, the types of production. 


Definition of Production

• Process of using the factors of production process or services
• Transformation of inputs into outputs

Short-run and Long-run Production

SHORT RUN

At least one of the inputs is fixed but the other input are varied

LONG RUN

All inputs are variable

FIXED INPUT

Quantity does not change according to output ( e.g machiner, land, building )

VARIABLE INPUT

Quantity change according to output (e.g raw materials, transportation)

Types of production

PRIMARY PRODUCTION

• ·         First stage on the production process
• ·         Use raw materials

SECONDARY PRODUCTION

• ·         Second stage on the production process
• ·         Involved manufacturing the finished goods from raw materials
• ·         Produced finished product

TERTIARY PRODUCTION

• ·         Third stage in production process
• ·         Not produce goods, but provides goods
• ·         Involves services

-Services divides into two which is commercial and direct services

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