ECON528 – Module 5

Markets and Allocations

Three types of firms:

  • Sole proprietorship: One owner
  • Partnerships: Multiple owners
  • Corporations: Owners are not the managers

 

Net Present Value (NPV) or Net Present Worth (NPW) = -C0 + t=1∑t Ci/(1+r)^t
C0 – Initial Investment
Ci – Cash Flow

 

Market Structure: the competitiveness of the industry (number of firms in the industry)

One firm in market: Monopoly

Oligopoly: Between monopoly and perfect condition

Perfect Condition: Large number of firms in the market

 

Perfect Condition:

  1. Large number of relatively small buyers and sellers
  2. Homogeneous Products (Identical)
  3. Free entry and exit
  4. Perfect Information

Firms are price takers

SupplyCurve

 

MarketFirm

Equilibrium Conditions (Short Run):

  1. Market is in Equilibrium (Supply = Demand)
  2. Firm is in Equilibrium (MR = MC at or above AVC)

 

LongRunE

Equilibrium Conditions (Long Run):

  1. Market is in Equilibrium (Supply = Demand)
  2. Firm is in Equilibrium (MR = MC at or above AVC)
  3. Profit = 0 (Economic Profit needs to be 0) MR = MC = ATC

 

MoreDemand

If the demand of the product goes up, the demand curve will shift to the right, the price of the product will go up. The market is still in short term equilibrium but not in long term equilibrium because there is +ve profit. That will attract more producers, the supply of the product will go up, the supply curve will shift to the right, price of the product will come down. The price of the product will go up for a short period until new producers get into the market. We will have more quantity of the product. The market will get to long term equilibrium.

 

 

Firm to Firm interplay

 

 

Consumers and Firms interplay