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Perfectly Competitive Markets

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Perfectly Competitive Markets
A firm’s decision about how much to produce or what price to charge depends on how competitive the market structure is. If the
Dangote cement raise their prices by
5%, there will be a small reduction in the quantity of cements demanded. If the conoil gas station raises its gasoline prices by 5%, there will be a huge reduction in the gas demanded.
In a very competitive market like the local gasoline market, a single station has very little choice in what price to charge. If the station is busy there is no reason to lower the price, but if it raises its price by 10 cents a gallon, it will have almost no customers.
We will study the extreme case of perfect competition, where firms are “price takers.”
In a perfectly competitive market, (i) there are many buyers and sellers, so each buyer or seller is a price taker, (ii) all sellers supply the same, identical product.
This is the model of supply and demand. If a seller could influence the price, it would not be acting according to a supply curve.
In the long run, we also require that (iii) firms can freely enter or exit the market.
Revenue of a Competitive Firm
For a competitive firm, the price it receives does not depend on the quantity it chooses to sell.
Marginal revenue equals the price of its output.
For example, if the price is $6, then the total revenue of selling 10 units is $60 and the total revenue of selling 11 units is $66. Marginal revenue, ªTR/ªQ = (66-60)/(11-10) = $6.
Profit Maximization
Obviously, both revenue and cost considerations determine the profit maximizing output choice.
But which of the cost functions is relevant?
The profit maximizing output choice involves
“thinking at the margin.”
We can also compare marginal revenue (which always equals the price, $6) and marginal cost.
• At outputs below 4, marginal cost is less than $6, so profits are increased by increasing output.
• When output is 4, marginal cost equals marginal revenue, so increasing output does not change profits.
• When output is 5 or higher, marginal cost is greater than marginal revenue, so increasing output would lower profits.
The Marginal Cost Curve and the
Firm’s Supply Decision
• Whenever marginal revenue (price) > marginal cost, the firm increases profits by producing one more unit.
• Whenever marginal revenue (price) < marginal cost, the firm increases profits by producing one less unit.
• A competitive firm can only be maximizing profits when price = marginal cost.
• Because the firm’s marginal cost curve determines how much the firm is willing to supply at any price, it is the competitive firm’s supply curve.
• One qualification: instead of choosing the optimal production, the firm might want to shut down and produce zero.
The Decision to Shut Down
In the short run, a firm should shut down when
P < min(AVC). This means that it is impossible for revenues per unit to be as high as variable cost per unit–it is better to avoid these variable costs. Compare profits of producing Q to the profits when the firm shuts down:
B(0) = - FC
B(Q) = P×Q - FC - VC
Therefore, B(Q) > B(0) when P×Q > VC.
Divide both sides by Q: P > AVC.
If we can find a Q where P > AVC, then producing Q is better than 0. If P < min(AVC) then it is impossible to do better than shutting down. Sunk costs are costs that are already incurred and cannot be recovered.
Notice that the firm’s fixed costs did not affect whether or not to shut down. Fixed costs are sunk in the short run.
In the 1970's Lockhead spent $ 1 billion developing a new airplane (Tristar). After sinking the money, it was clear that the venture
•An example is the question of whether to buy another train ticket if you lose the one you purchased. The cost of the ticket you purchased is sunk, and therefore, irrelevant.
Some fixed costs might not be sunk in the long run. For example, in the short run, you can produce zero output (shut down), but you cannot avoid your fixed capital costs.
In the long run, you can sell your factory and exit the industry when profits are negative.
The Firm’s Long Run Decision
In the long run, a profit-maximizing firm would exit the industry if TR < TC at all output levels.
Dividing by Q, the condition for exit is:
P < min(ATC)
Similarly, a potentially active firm should enter the industry if it can receive positive profits.
Remember that opportunity cost is included, so that the firm can receive higher profits in this industry than any other industry.
Enter if
P > min(ATC)
A perfectly competitive firm’s long run supply curve is 0 below min(ATC), and its MC curve above min(ATC).
The quantity at which ATC is minimized is the quantity that maximizes the firm’s profit per unit (sometimes called profit margin). Why would the firm want to produce more than that?
We can measure profits in the diagram as the area of the rectangle with width Q and height
P - ATC. If the price is less than ATC, then the area of the rectangle is the firm’s losses.
• Who was right?
• Answer: Both arguments are wrong. The billion dollar initial investment is a sunk cost that is irrelevant to the decision.
Compare the extra revenue of continuing with the extra cost.
“Don’t cry over spilt milk.”


Dangote Sugar Refinery Plc is subsidiary of Dangote Group. The Dangote Group is a leading and corporate responsible organization in Nigeria-West Africa with its operational headquarters in the bustling metropolis of Lagos, Nigeria. The Group is one of Nigeria’s foremost-diversified business conglomerates, with a hard- earned reputation for excellent business practices and product quality.Dangote Sugar Refinery Plc is principally engaged in refining raw sugar into edible sugar and sale of refined sugar.

Company Information
Head Office 42/44, Warehouse Road,
Apapa, Lagos, Nigeria.
Tel: 234-01-5804646-8
Fax: 234-01-2714466, 5804654
Nature of Business Refining Raw Sugar into Edible Sugar and Sale of R
Start of Operation 2000
Date Listed on the Exchange 8th March, 2007
Directors Alhaji Aliko Dangote, CON - (Chairman)
Alhaji Sani Dangote
Engr. Abdullahi Sule (MD/CEO (Resigned with effect from 15th July, 2010)
Mr. Suleiman Olarinde (Ag. MD/CEO) (appointed with effect from 15th July, 2010)
Mr. Olakunle Alake
Ms. Bennedikter Molokwu dr. Konyinsola Ajayi (SAN)
Mr. Uzoma Nwankwo
Alhaji Abdu Dantata
Company Secretary Chioma Madubuko (Mrs.)
Auditors Akintola Williams Deloitte
(Chartered Accountants)
235, Ikorodu Road,
Ilupeju, Lagos.
Company Registrars Zenith Registrars Limited,
Plot 89A Ajose Adeogun Street,
Victoria Island, Lagos

Full name

Modandola House 42/44 Warehouse Road Apapa Lagos, Nigeria ; Apapa; Lagos

Status: Listed
Legal Form: Other non-liability limited
Operational Status: Operational
Financial Auditors: Akintola Williams Deloitte (2008)
Incorporation Date: December 1, 1999
Total Employees: 745

. According to the workers, 80% of the staff of the company are casual workers. Many of these casual workers have worked for upward of seven to eight years yet they remain casual workers in absolute disregard for Nigeria’s labor laws. They work from 7am to 6pm under terrible working conditions and are paid a peanut of N500 per day.

. Dangote Sugar Refinery PLC commenced business in March 2000 as the sugar division of Dangote Industries Limited. The sugar-refining factory at Apapa port was commissioned in 2001 with an initial installed capacity to process 600,000 MT of raw sugar per annum.
The refinery has since undergone two expansions increasing the production capacity to about 1.44 million MT per annum, making it the largest sugar refinery in sub Saharan Africa and second largest in the world.
SAVANNAH SUGAR COMPANY LTD, ADAMAWA Integrated sugar cane farming & Sugar milling Capacity of 50,000 Mtpa (sugar mill) Plans to Increase capacity to 1 million tonnes per annum

SUGAR FOCUS - SAVANNAH SUGAR COMPANY SSC was established by the Federal Government in 1971. Transfer of ownership to DIL took place in 2003. Cultivating a total of 18,000 hectares-employing approximately 20,000 made up of direct employees and farmer out growers. FOS - designed in conjunction with national sugar development council. Projection is to produce 1 million tonnes of white sugar by 2015
-Cultivating 100,000 hectares in 4 states
-Employing over 50,000 .
Our Product(s)

Vitamin A Fortified Sugar Unfortified industrial sugar
Vitamin A Fortified Sugar
Dangote Vitamin A fortified sugar is a fine white granulated sugar, refined to the highest quality and dissolves easily. This all-purpose white sugar is ideal for table use, baking, sweetening of beverages etc.
Unfortified industrial sugar
Dangote unfortified sugar is a specially processed sugar grade used by pharmaceuticals, food and beverage manufacturing companies etc. Dangote sugar is a household name amongst manufacturers for the production of high quality sugar that helps them deliver good products to their market with the desired sweetness.

Selling price of 50kg (1bag) -N 7500 each.

Profit and Loss Information 2010 2009
Gross Premium N22.787b N19.107b
Profit Before Tax N5.839b N5.591b
Taxation (N1.868b) (N1.397b)
Profit After Tax N3.971b N4.193b 31-06-10 31-12-09
Fixed Assets N16.498b N16.696b
Stock N17.176b N14.094b
Trade Debtors N5.760b N5.946b
Cash And Bank Balance N17.775b N22.878b
Other Debit Balances N16.877b N17.333b
Trade Creditors N13.907b N14.003b
Other Credit Balances N30.167b N26.003b
Net Assets N45.583b N41.612b

If the market price of a good is $15, and a firm produces 10 units of a good per day, then its total revenue for the day will be $15 × 10 = $150. The marginal revenue associated with producing an eleventh unit per day would be the market price, $15; total revenue per day would increase from $150 to $165 (11 × $15).

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