Microeconomics Lecture: The Dynamics of Perfect Markets (Topic 5)

Acknowledgement

• Elements based on Chapter 9 from "Economics for South African Students" by Mohr, P. & associates.

Overview

• Revision of cost and revenue, short-run and long-run
  • Perfect competition
  • Profit maximisation and market structure
  • Output, profits, losses, and supply
  • Long-run equilibrium
  • Competition policies

Glossary

• Key concepts related to costs, revenues, and market equilibrium.

Profit, Revenue, and Cost

Key Equations

• Total Revenue (TR): TR = Price x Quantity
• Average Revenue (AR): AR = TR/Q
• Marginal Revenue (MR): MR = ΔTR/ ΔQ

Cost Theory

• Short-run: At least one input is fixed.
• Long-run: All inputs are variable.
• Opportunity Cost: Cost incurred by choosing one option over the best alternative.
• Economic vs. Accounting Costs:
  • Explicit Costs: Direct monetary payments.
  • Implicit Costs: Non-monetary opportunity costs.

Types of Profit

• Normal Profit: Minimum amount required to keep a business running.
• Economic Profit: Surplus after covering both explicit and implicit costs.
• Accounting Profit: Surplus after covering only explicit costs.

Cost Calculations

• Total Cost (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)
• Average Cost (AC) = TC/Q
• Marginal Cost (MC) = ΔTC/ΔQ

Production and Costs

• Short-run: Mixed fixed and variable costs.
• Fixed Costs: Do not change with output level.
• Variable Costs: Change with output level.
• Long-run: All costs are variable; potential for economies of scale.

Economies and Diseconomies of Scale

• Economies of Scale: Lower average costs with higher output.
• Diseconomies of Scale: Increased costs due to inefficiencies.

Perfect Competition

• Large number of buyers and sellers who are price-takers.
• Homogeneous products, no collusion, and perfect market knowledge.

Characteristics

• Free entry and exit
• Efficient transport and communication
• Perfect information

Profit Maximisation

• Total Cost and Revenue Approach: Profit is maximized when the distance between total revenue and total cost is largest.
• Marginal Cost and Revenue Approach: Profit is maximized where MR = MC.

Market Structures

• Perfect Competition: Large number of firms, homogeneous products.
• Monopoly: Single firm, unique product.
• Oligopoly: Few firms, possible collusion.
• Monopolistic Competition: Many firms, differentiated products.

Long-run Equilibrium

• Firms make normal profit due to free entry and exit.

Shut-Down Point

• A firm should shut down if AR < AVC.
• The supply curve is part of the MC curve above the shut-down point.

Competition Policies

Aims

• Prevent market dominance and promote fair competition.
• Regulate mergers and prevent price gouging.

Institutions

• Competition Commission: Evaluates mergers and market practices.
• Competition Tribunal: Reviews recommendations.
• Competition Appeal Court: Handles disputes.

South Africa’s Anti-Monopolistic Policy

• Promote access to resources for disadvantaged groups.
• Comply with international trade agreements.

Evaluation of Competition Policy

• Success: Establishment of regulatory bodies, curbing conglomerate power.
• Failure: Frequent collusion investigations, lenient fines.

This lecture provides a comprehensive overview of perfect markets, addressing both theoretical and practical aspects related to costs, competition, and policy implications. Understanding these concepts helps in analyzing market dynamics and the impact of regulatory measures.