Explain why the objectives of a firm in a perfectly competitive market may be different from the objectives of a firm in an imperfect market structure.

INTRODUCTION:

  1. Compare PC against oligopoly/monopoly/ monopolistic competitive

Differences in characteristics : Imperfect information, Number of firms , Barriers to entry à size of market power

PC firms àprice takers; imperfectly competitive firms àprice makers

DEVELOPMENT:

  1. Explain that their objectives can be similar.

Traditional economic theory:

All firms, perfectly competitive firms and imperfectly competitive firms à make their output decision based on same objective of profit maximizing.  

Define Profit and establish profit maximising output . Profits = TR – TC). Profit maximising output à MC = MR.

  • Explain that their objectives are likely to be different.

Likely scenario : Perfectly competitive firms à practise profit maximization.  Firms in imperfect market structures à likely to practise other objectives.

  • Explain why perfectly competitive firms are likely to practice profit maximization:

Able to maximise profit:  Due to ability to get perfect information in the market.

Want/Need to maximise profit : Due to need for survival.  

Illustrate with cost and revenue diagram

  • Explain why imperfect competitive firms are not likely to practice profit maximization:

In theory, imperfectly competitive firms may have other objective than to maximise profits.

Not able to maximise profit: Not able to get the necessary information on MC and MR. Hence, may set price through other ways e.g.  cost plus pricing.

Do not want to maximise profits: Need not necessarily want to maximise profit. Could have other managerial and behaviour objectives. E.g. maximize sales revenue,  predatory pricing, limit pricing , AC/MC pricing.

5.   CONCLUSION

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