Perfect Competition

Market structures describe important features of the economic environment in which firms operate.  A firm’s decisions about how much to produce or what price to charge depend on the structure of the market.  Perfect competition is the most basic of market structures. 

When a perfect competition exists it means that an individual buyer or seller has no control over the price since price is determined by MARKET demand and supply.  Because supply and demand is the determinants of price, price is fixed and can be represented as a horizontal line.  (See figure 1).

Figure 1:

 

Now that you know what a perfect competition market structure is, is it important to know how firms in this market structure maximize profit in the short run.  All firms try to maximize economic profit, which is any profit above normal profit.  Subtracting TC from TR is one way to find the profit maximization output.  Another way to find the profit maximizing rate of output is to focus on MR and MC.  When MR=MC profit maximization occurs.

Here are three important short run maximization graphs:

 

For more on perfect competition look under video’s

Oefeninge

VRAAG 1 Veronderstel dat Jan het R500 per maand wat hy spandeer op boeke vir sy Kindle of om Apps vir sy iPad te koop. Beide die boeke en Apps kos R100 elk oor die internet.  Die volgende tabel stel sy nut voor. Voltooi die tabel en bepaal by watter verbruikskombinasie hy sy nut sal maksimeer.				QUESTION 1 Suppose that Jan has R500 per month to spend on Kindle books or iPad Apps. Both of these cost R100 each over the internet The following table indicates his utility Complete the table and determine at which consumption combination he will maximise his utility.
	Kindle books				iPad Apps
Eenhede / Units	TU Totale nut	MU Grensnut	MU/P		TU Totale nut	MU Grensnut	MU/P
0	0					0
1	10					14
2	18					10
3	24					8
4	28					6

VRAAG 2		QUESTION 2
Die volgende tabel verteenwoordig die totale nut van Hotdogs en Amstel Lager wat deur Liezl verbruik word. Teken die tabel oor in jou antwoordskrif, voltooi en toon alle berekeninge. Lei Liezl se verbruikersewewigsposisie (hoeveelheid van  elke produk en bedrag daarop spandeer) vir die twee goedere af waar die prys van Hotdogs R10 per eenheid en die prys van Amstel lager R5 per eenheid is. Liezl se beskikbare inkome is R50.		The following table represents the total utility for Hotdogs and Amstel Lager consumed by Liezl. Redraw the table in your answer sheet, complete and show all calculations. Derive Liezl’s consumer equilibrium position (quantity of and expenditure on each product) for the two goods where the price of Hotdogs is R10 per unit and the price of Amstel lager is R5 per unit.   Liezl’s available income is R50.
Hotdogs @ R10 Amstel Lager @ R5 Q TU MU MU PH TU MU MU PA 0 0 0 1 750 550 2 790 25 3 30 20 4 830 610 5 4 622 6 824 612

VRAAG 3 Beantwoord die volgende vraag: Die prys van biltong het toegeneem vanaf R150 na R160 per kilogram.  As gevolg van die styging in prys het die hoeveelheid biltong gevra vanaf 1260 kilogram na 1207 kilogram per dag gedaal.

QUESTION 3 Answer the following question: The price of biltong increased from R150 to R160 per kilogram.  Due to the increase in price quantity demanded for biltong decreases from 1260 kilogram to 1207 kilogram per day.

Theory of Production

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Theory of Production

In the previous blog posts the utility and demand of the consumer were analysed. But in a microeconomic model, there is not only a consumer who exercises a demand – there is also a producer. The producers supply goods and services to the consumers. The first economic assumption is maximum profit. The motive of the producer is to make a profit! This motive is valid for the farmer, the shoe-producer, the pharmacists, the hairdresser and any other producer of goods and services.

Watch this video to get a better  perspective on Theory of Production.

Utility in a nutshell

After watching the video of utility it should be clear to you that it is all about consumer demand theory according to the utility approach. The satisfaction or use that a consumer receives from the consumption of a product was investigated. This implies that a saturation point and a budget constraint exists, which should also be taken into regard on the demand side. Utility can also be negative due to storage requirements or other problems with shortages - too much of something good is usually bad

Pay special attention to:

• What is meant with utility
• We prefer to rank utility ordinal, which means we determine what is being preferred more that something else, according to one’s ranking order of preference, because it is difficult to measure utility. Now it is much easier to say I prefer this one above that and another one even more.
• Total utility increases as more of a product is being consumed
• Marginal utility is very important, and make sure you are able to calculate marginal utility from total utility given in the table (or schedule). “Marginal” means additional or extra. It is every time the extra use that you would obtain by consuming an additional unit of that product.        

               (

\MU₂ = TU₂ –TU₁   and   TU₂ = TU₁ + MU₂)

Note the Law of Diminishing Marginal Utility. As one uses more of a product the extra value that you get out of it is becoming constantly less.

Here is a summary on how to calculate MU, TU and weighted marginal utility.