Char Lee Econ

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Char Lee Econ

  1. 1. Please hand in your homework <ul><li>And collect your old homework </li></ul><ul><li>Make your homework has: </li></ul><ul><ul><li>1. English Name </li></ul></ul><ul><ul><li>2. Chinese Name (IN PINYIN) </li></ul></ul><ul><ul><li>3. Student number </li></ul></ul><ul><ul><li>4. Section Number </li></ul></ul><ul><li>Please staple, tie, tape, glue, stick, wrap, fold, or in some other fashion make sure that multiple pages of your homework will stay together </li></ul>
  2. 2. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  3. 3. Homework Answers <ul><li>Calculate the missing values in the following table </li></ul>11 18 2 20 5 3 4 4 15 3 5 2 6 6 1 Marginal Utility Total Utility Number of Ice Cream cones Consumed
  4. 4. Homework Answers <ul><li>5 When Jeff’s mom offers him a second scoop of her homemade mashed potatoes at the family dinner table and Jeff’s marginal utility of that second scoop equals zero, how will he respond to his mom? </li></ul><ul><li>He will refuse the second scoop, as he has reached his satiation point. He gets no more satisfaction out of eating the second scoop of mashed potatoes, and will thus decline. </li></ul>
  5. 5. Homework Answers <ul><li>Jamie’s favorite food is pizza. Jamie eats pizza several times a week, but Jamie also eats chicken, fish, hamburgers and vegetables. Explain why Jamie does not eat pizza only. </li></ul><ul><li>The more pizza Jamie eats, the lower his marginal utility (additional satisfaction) will be from eating more pizza. As marginal utility continues to decrease, at some point, the marginal utility per dollar for some other food will become greater than the marginal utility per dollar of pizza, at which point Jamie will start consuming other foods. </li></ul>
  6. 6. Celina has $12 to spend. Books cost $1, Ice cream costs $3, and workouts cost $10. How much of each good will she consume? 5 6 9 6 7 6 10 5 12 5 8 5 15 4 15 4 9 4 20 3 18 3 10 3 25 2 21 2 11 2 30 1 24 1 12 1 Marginal utility of workouts # Workouts Marginal utility of ice cream # Ice cream Marginal Utility of books # books
  7. 7. <ul><li>Write two equations where the first equation states the accounting profit and the second equation states economic profit. Why do economists define profit differently than accountants? </li></ul><ul><li>Accounting profit = Total Revenue – Explicit costs </li></ul><ul><li>Economic profit = Accounting profit – implicit opportunity costs </li></ul><ul><li>Economists include implicit costs in our calculation of profit, whereas accountants ignore these costs. </li></ul>
  8. 8. <ul><li>What is the difference between the long run and the short run? In which of these is there a fixed input? What is the fixed input? Which one of these is identified with the planning horizon? </li></ul><ul><li>In the short run, capital is fixed, in the long run both capital and labor are variable. We associate the long run with the planning horizon </li></ul>
  9. 9. <ul><li>State the definition of marginal product. How does this differ from the definition of average product? Which term does the law of diminishing returns refer to? </li></ul><ul><li>Marginal product is the additional output we get from adding one more unit of labor </li></ul><ul><li>Average product is the average amount of product each unit of input is responsible for producing </li></ul><ul><li>Marginal product is affected by the law of diminishing returns </li></ul>
  10. 10. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  11. 11. A Recap <ul><li>Let’s quickly go over what we’ve talked about the last two lectures </li></ul><ul><ul><li>1. Pricing and output in perfect competition </li></ul></ul><ul><ul><li>2. Pricing and output in monopolies </li></ul></ul>
  12. 12. Perfect competition <ul><li>Very many buyers and sellers </li></ul><ul><li>Standardized product (no differentiation) </li></ul><ul><li>Market entry and exit very easy </li></ul><ul><li>Firms are price takers </li></ul><ul><li>So how do they decide what level of output to produce at? </li></ul>
  13. 13. 1,309.6 1,086.7 900.0 745.3 618.4 515.1 431.2 362.5 304.8 253.9 205.6 155.7 100 TC -112.90 222.9 109.13 110 12 -76.70 186.7 98.79 110 11 -44.70 154.7 90.00 110 10 -16.90 126.9 82.81 110 9 6.70 103.3 77.30 110 8 26.10 83.9 73.59 110 7 41.30 68.7 71.87 110 6 52.30 57.7 72.50 110 5 59.10 50.9 76.20 110 4 61.70 48.3 84.63 110 3 60.10 49.9 102.80 110 2 54.30 55.7 155.70 110 1 - - - - 0 M  MC AC MR=P=AR Q
  14. 14. The MR - MC approach <ul><ul><li>A firm that wants to maximize its profit (or minimize its loss) should produce a level of output at which the additional revenue received from the last unit is equal to the additional cost of producing that unit. In short, MR=MC. </li></ul></ul><ul><ul><li>For the perfectly competitive firm, the MR=MC rule may be restated as P=MC. </li></ul></ul><ul><ul><ul><li>This is because P=MR in perfectly competitive markets. </li></ul></ul></ul>
  15. 15. Marginal Cost, Average Cost, and Average Variable Cost Curves Dollars Quantity Total Profit Profit = TR – TC = (P – AC) x Q Marginal Cost Average Cost Average Variable Cost Price = MR = D Q*
  16. 16. Monopoly <ul><li>There’s only one firm in the industry </li></ul><ul><li>The firm is the industry </li></ul><ul><li>Market entry impossible or illegal </li></ul><ul><li>Firm is a price setter/maker </li></ul><ul><li>But if a firm wants to sell more of a unit, it must lower prices </li></ul><ul><li>This will result in lower marginal revenues as quantity sold increases </li></ul>
  17. 17. Assume demand is a straight line, for example: Qd = 101 – P Qd Price Total Revenue Marginal Revenue 1 2 3 4 5 6 7 8 9 10 100 100 100 99 198 98 98 294 96 97 388 94 96 480 92 95 570 90 94 658 88 93 744 86 92 828 84 91 910 82 You can see marginal revenue decreases as we increase quantity
  18. 18. 12 11 10 9 8 7 6 5 4 3 2 1 0 Q -316.7 186.7 1,086.7 98.79 -30 770 70 -589.6 222.9 1,309.6 109.13 -50 720 60 -100 154.7 900.0 90 -10 800 80 64.70 126.9 745.3 82.81 10 810 90 181.60 103.3 618.4 77.3 30 800 100 254.90 83.9 515.1 73.59 50 770 110 288.80 68.7 431.2 71.87 70 720 120 287.50 57.7 362.5 72.5 90 650 130 255.20 50.9 304.8 76.2 110 560 140 196.10 48.3 253.9 84.63 130 450 150 114.40 49.9 205.6 102.8 150 320 160 14.30 55.7 155.7 155.7 170 170 170 -100.0 - 100 - - 0 180  MC TC AC MR TR P
  19. 19. Pricing and Output in Monopoly Markets <ul><li>Monopolies are also going to want to produce up until the point where marginal costs start to exceed marginal revenues </li></ul><ul><li>Monopolies are going to produce at a level where MR=MC </li></ul><ul><li>The exact same rule as perfect competition </li></ul><ul><li>Even though monopolies have the power to set prices, the are still limited by a downward sloping demand curve, and increasing marginal costs of production </li></ul>
  20. 20. Monopoly Output and Price Monopoly price Monopoly output Dollars Quantity Marginal Revenue Marginal Cost Demand #1 the monopolist sets output to equate marginal revenue and marginal cost #2 The monopolist charges as much as the market will bear for that output.
  21. 21. Profit, Breakeven, or Loss Price Profit maximizing output Dollars Quantity Marginal Revenue Marginal Cost Demand Average Cost Number of unit Profit per unit Profit
  22. 22. Monopoly Breakeven, or Loss Marginal cost Average cost Demand Marginal revenue Price Profit-maximizing output Quantity Demand Quantity Marginal revenue Marginal cost Average cost Loss-minimizing quantity Price Maximum profit is zero profit Average cost exceeds price Loss per unit Number of units
  23. 23. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  24. 24. Efficiency and Price Discrimination <ul><li>Monopoly is allocatively inefficient because the quantity that equates marginal cost and marginal revenue falls short of the quantity that equates marginal cost and demand </li></ul><ul><ul><li>The profit maximizing quantity is less than the efficient quantity </li></ul></ul><ul><ul><li>The area of deadweight loss shows the benefits consumers would have received from the additional output minus the cost the firm would have incurred to produce it </li></ul></ul>
  25. 25. Efficiency in perfect competition Demand Competitive Output Quantity Supply Maximum social surplus
  26. 26. The Inefficiency of Monopoly Monopoly Price Monopoly Output Dollars Quantity Marginal Cost Demand = marginal benefit Efficient Output Average cost • Marginal revenue Efficiency forgone: the deadweight loss from monopoly.
  27. 27. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  28. 28. The Inefficiency of Monopoly <ul><li>It may be possible for monopolies to eliminate these inefficiencies </li></ul><ul><li>This would come through the practice of price discrimination </li></ul><ul><li>Price discrimination is when a firm has the ability to charge different customers or different customer segments different prices </li></ul><ul><li>If the monopolist knows each individual’s demand, he can charge each the highest price they would be willing to pay, thus producing at a more efficient level </li></ul>
  29. 29. Price Discrimination 1 2 3 4 5 6 7 8 9 10 $19 $18 $17 $16 $15 $14 $13 $12 $ 11 $10 • Marginal cost Demand = Marginal benefit = Marginal revenue $ Quantity The arrows are prices, which differ from customer to customer Efficient and profit-maximizing output
  30. 30. Price Discrimination <ul><li>Another example of price discrimination is multi-part pricing </li></ul><ul><li>Multi-part pricing depends upon the amount consumed </li></ul><ul><li>The monopolist sets the price high for the first units consumed, since those are the hardest to do without. The price for additional units could be lower </li></ul><ul><li>Multi-pare pricing causes marginal revenue to fall somewhere between the extremes of the monopolist with a single price and one able to practice perfect price discrimination </li></ul>
  31. 31. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  32. 32. Antitrust and Regulation <ul><li>Antitrust law is a body of public policies designed to limit the abuse of market power, and is enforced by the justice department </li></ul><ul><li>The antitrust laws neither make monopoly illegal nor apply to monopoly </li></ul><ul><li>Antitrust laws are intended to curb abuses of market power, of which monopolists have the most </li></ul>
  33. 33. Examples of Antitrust Legislation <ul><li>Sherman Act (1890) </li></ul><ul><li>Federal Trade Commission Act (1914) </li></ul><ul><li>Clayton Act (1914) </li></ul><ul><li>Robinson-Patman Act (1936) </li></ul><ul><li>Celler-Kefauver Antimerger Act (1950) </li></ul>
  34. 34. Antitrust Policy Exclusive dealing: A firm prohibits its distributors from selling competitors’ products. A firm assigns a geographic area to a distributor and prohibits other distributors from operating in that territory. A firm prices a product below the marginal cost of producing it to drive rivals out of business. A firm charges different customers different prices for the same product. Exclusive territories: Predatory pricing: Price discrimination: GLOSSARY OF TERMS
  35. 35. Antitrust Policy A firm prohibits rivals from purchasing/using scarce resources (called essential facilities) that are needed to stay in business. Refusals to deal: Resale price maintenance: Tie-in sales: A manufacturer sets a minimum retail price for its product. A firm conditions the purchase of one product upon the purchase of another. GLOSSARY OF TERMS
  36. 36. Antitrust Law and the Court <ul><li>American Tobacco (1911) </li></ul><ul><li>Standard Oil (1911) </li></ul><ul><li>U.S. Steel (1920) </li></ul><ul><li>Paramount Pictures (1948) </li></ul><ul><li>Dupont (The cellophane case) (1956) </li></ul><ul><li>Von’s Grocery (1956) </li></ul><ul><li>IBM (1982) </li></ul><ul><li>Microsoft 1 (1994) </li></ul><ul><li>Microsoft 2 (1998) </li></ul><ul><li>The compact disk case (2003) </li></ul>Firms that violate the antitrust laws are sometimes broken into pieces.
  37. 37. <ul><li>The courts pay careful consideration to the question of the scope of the market. </li></ul><ul><li>Mergers are a focus of attention in antitrust law and enforcement. </li></ul><ul><li>Antitrust policy allows mergers to be blocked by the government. </li></ul><ul><li>Mergers, of whatever type, are allowed when, in the opinion or the government, two conditions are met: </li></ul><ul><ul><li>The market is not concentrated after the merger. </li></ul></ul><ul><ul><li>Entry of new competitors into the market is possible. </li></ul></ul>Antitrust Law and the Court
  38. 38. The Herfindahl-Hirschman Index <ul><li>The method used by the government to measure concentration in merger cases is called the Herfindahl-Hirschman index (HHI). </li></ul><ul><li>The HHI is the sum of the squared market shares of all the firms in the market. </li></ul><ul><ul><li>For an infinite number of firms in an industry, the value of the HHI will be as small as zero. This value would apply to a purely competitive industry. </li></ul></ul><ul><ul><li>At the other extreme the maximum value for HHI is 10,000. This value applies when there is a pure monopoly in the market. </li></ul></ul>
  39. 39. Alternatives to Regulation <ul><li>If a monopoly is a natural monopoly the government will typically either own it or regulate it with rate-of-return regulation that restrict the monopolist from charging more than average cost. </li></ul><ul><li>Rate-of-return pricing is also known as average cost pricing. </li></ul><ul><li>To avoid the inefficiencies of regulation, economist recommend alternatives like franchise monopoly, which is a right to be the exclusive provider of a service. </li></ul>
  40. 40. <ul><li>The government has allowed deregulation in some industries. </li></ul><ul><li>Deregulation is the scaling back of government regulation of industry. </li></ul><ul><li>The reduction of government ownership of industries is referred to as privatization. </li></ul>Alternatives to Regulation
  41. 41. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  42. 42. Last Week <ul><li>We distinguished between perfect competition and monopoly </li></ul><ul><li>Perfect competition is perfect because firms have no market power </li></ul><ul><li>There’s no competition with monopolies, because there’s only one firm </li></ul><ul><li>Monopolistic competition and oligopoly are “imperfect competition </li></ul>
  43. 43. Imperfect Competition <ul><li>Monopolistic competition and oligopoly: </li></ul><ul><ul><li>Firms in these market have power to set prices to a certain degree </li></ul></ul><ul><ul><li>Don’t have absolute market power </li></ul></ul><ul><ul><li>Mutual interdependence: interaction among competitors when making decisions </li></ul></ul>
  44. 44. Imperfect Competition <ul><li>Monopolistic competition and oligopoly: </li></ul><ul><ul><li>Also have non-price competition </li></ul></ul><ul><ul><li>Largely based upon differentiation </li></ul></ul><ul><ul><li>Decision making going to be much harder than with monopoly or perfect competition </li></ul></ul>
  45. 45. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  46. 46. Monopolistic Competition <ul><li>Large number of firms in the industry </li></ul><ul><li>Market entry and exit is relatively easy </li></ul><ul><li>Firms have an ability to set prices </li></ul><ul><li>Ability to set prices comes from ability to differentiate product </li></ul><ul><li>Non-price competition is going to be very important </li></ul><ul><li>Firms can earn a long run economic profit </li></ul>
  47. 47. Monopolistic Competition <ul><li>E.g. Hairdressers </li></ul><ul><ul><li>There are many hairdressers in Beijing, and they are all relatively small </li></ul></ul><ul><ul><li>It’s relatively easy to open or close a hairdressing shop (enter and exit the market) </li></ul></ul><ul><ul><li>Products of hairdressing shops are not perfect substitutes </li></ul></ul><ul><ul><ul><li>Locations different (I’m not going to go to xicheng to cut my hair) </li></ul></ul></ul><ul><ul><ul><li>Styles may differ </li></ul></ul></ul><ul><ul><ul><li>Salon décor may differ </li></ul></ul></ul><ul><ul><ul><li>Staff may differ </li></ul></ul></ul>
  48. 48. Other examples of monopolistic competition <ul><li>Retail clothing stores </li></ul><ul><li>Retail shoe stores </li></ul><ul><li>Gas stations (in America) </li></ul><ul><li>Fast food restaurants </li></ul><ul><li>Car dealers </li></ul><ul><li>DVD stores </li></ul><ul><li>Legal services </li></ul>
  49. 49. Today <ul><li>A recap of the last two lectures </li></ul><ul><li>Inefficiencies in monopoly </li></ul><ul><li>Price discrimination </li></ul><ul><li>Regulation and alternatives </li></ul><ul><li>Imperfect competition introduced </li></ul><ul><li>Monopolistic competition introduced </li></ul><ul><li>Pricing and output decisions in monopolistic competition </li></ul><ul><li>Review questions </li></ul>
  50. 50. Monopolistic Competition <ul><li>We assume firms in monopolistic competition will follow the MR=MC rule to maximize profits </li></ul><ul><li>We will use the same graph to depict costs, revenues, and profits as we did when looking at monopoly </li></ul>
  51. 51. Monopolistic Competition Q $ D MR AC MC Assume this is the marginal cost and average cost curve an individual firm engaged in monopolistic competition faces And this is the demand curve, and resulting marginal revenue curve they face
  52. 52. Monopolistic Competition Q $ D MR AC MC P* Q* The firm is going to charge a price where the quantity demanded equals an amount where MR = MC At this price and quantity, the firm would enjoy a profit
  53. 53. Monopolistic Competition Q $ D MR’ AC MC Other firms are going to see that this firm is enjoying a profit, and will thus decide to enter the market as well This can be reflected as a shift back in the demand curve (Which is accompanied by a shift back in the MR curve as well) D’
  54. 54. Monopolistic Competition Q $ D MR’ AC MC Why a shift back??? Think about it like this: An increase in supply of this product, means each individual firm is going to experience a decreased market share I now face a lower demand individually, because the same amount of people are buying the product, but now from more firms than before D’
  55. 55. Monopolistic Competition Q $ D MR’ AC MC It’s hypothesized that firms will continue to enter the market until demand shifts back so much that profits level out at a normal profit D’ Because demand has shifted back, firms face lower levels of MR at every level of output
  56. 56. Monopolistic Competition Q $ D MR’ AC MC P* Q* Faced with a lower demand and marginal revenues, firms will have to charge a lower price to get a level of quantity where MR=MC D’ At this new quantity, AC=P, meaning profits are normal
  57. 57. Monopolistic Competition <ul><li>Again: In monopolistic competition, firms will also set a price so that quantity demanded will yield MR=MC </li></ul><ul><li>If firms are making a profit, more firms will then enter the market </li></ul><ul><li>The individual firm will see this as a shift back in the demand curve </li></ul><ul><li>Now they are faced with a lower demand curve, and lower marginal revenues at every level of output </li></ul>
  58. 58. Monopolistic Competition <ul><li>In order to get a new quantity so that MR=MC (because MR has now shifted back) firms must lower their prices </li></ul><ul><li>As they lower their prices, their economic profits start to decrease </li></ul><ul><li>Eventually all economic profits will disappear, and firms will make normal profits in the long run </li></ul>
  59. 59. Monopolistic Competition Q $ D MR’ AC MC P* Q* D’
  60. 60. Monopolistic Competition <ul><li>One could see the opposite would be true if organizations were making a loss in monopolistic competition </li></ul><ul><li>We would see firms starting to leave the market </li></ul><ul><li>This would be seen by individual firms as an increase in demand for the product </li></ul><ul><li>They could then raise prices, until all losses disappeared, and they enjoyed a normal profit </li></ul>
  61. 61. Monopolistic Competition $ Q D MR AC MC P* Q* Economic Loss
  62. 62. Monopolistic Competition $ Q D AC MC P* Q* D’ MR’
  63. 63. Monopolistic Competition <ul><li>In order for firms to continue to make economic profits, they will have to differentiate themselves, so that demand for their product increases </li></ul><ul><li>But in the long run, differentiation will always be followed by imitation </li></ul><ul><li>It’s difficult to impossible for firms in monopolistic competition to make an economic profit in the long run </li></ul>
  64. 64. Monopolistic Competition <ul><li>Examples of continued differentiation from your book: </li></ul><ul><ul><li>Indian-Chinese food: Chinese food as it is supposed to be served in India </li></ul></ul><ul><ul><li>Pakistani-Italian Food </li></ul></ul><ul><ul><li>Japanese spaghetti </li></ul></ul><ul><ul><li>Russian sushi </li></ul></ul>
  65. 65. Monopolistic Competition <ul><li>Once more: </li></ul><ul><ul><li>Monopolistic competition occurs when there are many small firms and market entry and exit is relatively easy </li></ul></ul><ul><ul><li>Firms can now differentiate their product to get a competitive advantage </li></ul></ul><ul><ul><li>Like a monopoly will sell at a price so that the quantity demanded will equal an amount yielding MC = MR </li></ul></ul>
  66. 66. Monopolistic Competition <ul><li>They may make an economic profit, loss, or normal profit at this level of P and Q </li></ul><ul><li>In the long run other firms will enter or exit the market, until firms are forced to adjust their price and quantity to a level where they are only making a normal profit </li></ul>
  67. 67. To Sum Up <ul><li>Today we started with a brief review of pricing and output in perfect competition and monopoly </li></ul><ul><li>We then saw that monopoly is very inefficient </li></ul><ul><li>It’s going to lead to deadweight loss in the economy </li></ul>
  68. 68. To Sum Up <ul><li>One way to avoid deadweight loss by monopolies might be through price discrimination </li></ul><ul><li>Monopolies can practice perfect price discrimination </li></ul><ul><li>This is difficult </li></ul><ul><li>They can also practice multi-part pricing </li></ul><ul><li>This is a little easier </li></ul>
  69. 69. To Sum Up <ul><li>Because monopolies are so inefficient and have the ability to charge unfairly high prices, the government in the U.S. has seen fit to regulate monopolies </li></ul><ul><li>There are a number of laws called anti-trust laws which were created to limit market power of individual firms </li></ul><ul><li>We looked at a number of examples where companies have had anti-trust suits filed against them </li></ul>
  70. 70. To Sum Up <ul><li>One way that governments can regulate monopolistic type firms is to limit the price they can charge to the average cost of production </li></ul><ul><li>This will decrease deadweight loss substantially </li></ul><ul><li>We then spoke briefly about some of these alternatives to regulation, such as deregulation and privatization </li></ul>
  71. 71. To Sum Up <ul><li>We then moved on to look at the concept of monopolistic competition </li></ul><ul><li>Monopolistic competition is like perfect competition in that there are many firms that are small </li></ul><ul><li>But in monopolistic competition firms now have the power to set prices </li></ul><ul><li>This market power arises from their ability to differentiate their product </li></ul>
  72. 72. To Sum Up <ul><li>We assumed that monopolistic competition firms also face downward sloping demand curves and marginal revenue curves </li></ul><ul><li>Just like in monopoly, firms will produce where MR = MC, as this will maximize profits </li></ul><ul><li>Unlike monopoly, in the long run, other firms will either enter the market or start to imitate firms that are making profits </li></ul><ul><li>This means in the long run in monopolistic competition firms will generally only make normal profits as well </li></ul>
  73. 73. To Sum Up <ul><li>Firms that are seeking to make above normal profits in monopolistic competition will have to </li></ul><ul><ul><li>A. Differentiate their product </li></ul></ul><ul><ul><li>B. Keep costs to a minimum </li></ul></ul><ul><ul><li>C. Continue to find new ways to innovate, so as to stay one step ahead of the competition </li></ul></ul>
  74. 74. Homework <ul><li>Chapter 9, page 233: Questions 7, 12 </li></ul><ul><li>Chapter 10, page 265: Questions 5, 9, 10 </li></ul><ul><li>This is due one week from today </li></ul><ul><li>Keep up the good work with your homework, it’s helping you prepare for your exams! </li></ul><ul><li>Now let’s look at some questions, for real this time </li></ul>

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