Comp mono

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Comp mono

  1. 1. Perfect Competition <ul><li>Many (small) firms, producing a homogeneous (identical) product, none of which having an impact on the price; each firm's product is non-distinguishable from other firms' product. </li></ul><ul><li>b. Many buyers none of whom having any effect on the price. </li></ul><ul><li>c. No barriers to entry and exit: in the long run firms can shut down and leave the industry or new firms can come into the industry freely. </li></ul><ul><li>d. No interference in the market process: No price control or restrictions on production </li></ul><ul><li>e. All firms have equal and complete access to the available inputs (input markets) and production technology; all firms have the same production and cost functions. </li></ul><ul><li>f. All sellers and buyers have perfect information about the market conditions. </li></ul><ul><li>g. Making above-normal profits by existing firms will result in new entries into the industry. Firms that have losses shut down and leave the industry in the long run. </li></ul>
  2. 2. How is the market price Determined? <ul><li>Market Supply: </li></ul><ul><li>The (horizontal) sum of individual supply curves </li></ul><ul><li>Market Demand: </li></ul><ul><li>The (horizontal) sum of individual demand curves </li></ul>
  3. 3. P P 0 0 Q Q Dm Sm o p o p 1 Sm 1 D o D 1 S q o q 1 Market A typical firm
  4. 4. Perfect Competition:Profit Maximization in the Short Run <ul><li>An individual firm takes the market price as given; the demand each individual firm faces is horizontal. </li></ul><ul><li>MR = P: Demand </li></ul><ul><li>Set the price equal to MC </li></ul><ul><li>In the short- run the firm could have an economic profit </li></ul>
  5. 5. 0 Q $ SMC SATC AVC Pm a b c Qe D f , MR Profit Maximization in the Short Run
  6. 6. Adjustments in the Long Run <ul><li>If economic profits are present new firms will come into the industry </li></ul><ul><li>The Market price will fall </li></ul><ul><li>The profit shrinks </li></ul><ul><li>Input prices may go up </li></ul><ul><li>Firms try to stay profitable by taking advantage of economies of scale </li></ul><ul><li>Firms adopt an optimal size </li></ul><ul><li>Economic profits tend toward zero </li></ul>
  7. 7. Sm o Qm Pm1 Pm2 Pm3 Pm4 Sm 1 Sm 2 Sm 3 Sm 4 Q4 Q3 Q2 Q1 Qo $ MARKET o Dm
  8. 8. LATC D Pm Qe Q o SAC 1 SAC 2 SAC 3 SAC 4 A competitive firm’s long-run equilibrium
  9. 9. Long-Run Equilibrium in a Perfectly Competitive Market o o Q $P $ Dm Sm LATC SATC 1 SATC 2 SATC 3 D f Qe Pe MC 2 Market A typical firm
  10. 10. Long-Run Equilibrium under Perfect Competition <ul><li>Many “optimal-size” firms, each producing at the minimum long run average cost and charging the market price where: </li></ul><ul><li>P = MR= MC = SATC = LATC </li></ul><ul><li>Allocative efficiency: MC = P </li></ul><ul><li>Productive efficiency: MC= SATC = LATC </li></ul><ul><li>Zero economic profit (normal profit) : P = ATC </li></ul>
  11. 11. Pure Monopoly <ul><li>A single firm producing a homogenous or differentiated (unique) good and facing the market demand. </li></ul><ul><li>No substitutes </li></ul><ul><li>No new entries allowed </li></ul><ul><li>The monopoly is a price maker </li></ul><ul><li>P>MR </li></ul><ul><li>Possibility of a sustained economic profit </li></ul>
  12. 12. What circumstances lead to the formation of a monopoly? <ul><li>Extensive economies of scale: natural monopolies </li></ul><ul><li>Exclusive patent rights </li></ul><ul><li>Copy rights to intellectual properties </li></ul><ul><li>Government franchises </li></ul><ul><li>Exclusive access to a essential resource (input) </li></ul><ul><li>Cartels </li></ul><ul><li>A monopoly is a profit maximizer too! </li></ul>
  13. 13. $ Q Q $ Dm MR 0 0 TR a -2b -b Demand Faced by A Monopoly
  14. 14. SMC SATC D MR P Qe Q $ k m n o c Qc
  15. 15. The Dynamics of a Monopolistic Market <ul><li>As a profit maximizer a monopoly may try to take advantage of economies of scale </li></ul><ul><li>A monopoly tends to try to protect its monopolistic position </li></ul><ul><li>A monopoly may take advantage of technological advances </li></ul><ul><li>A monopoly may face changes in demand </li></ul><ul><li>A monopoly may try to promote its product to maintain demand </li></ul>
  16. 16. SMC SATC D MR P Qe Q $ n o LATC k m L-R Positive Economic Profit ATC>MC, P>MR, P>MC, P>ATC
  17. 17. Monopolies and Profit Maximization <ul><li>A monopoly faces the industry demand curve </li></ul><ul><li>To maximize profit: MR = MC </li></ul><ul><li>P = 80 - .0008Q ; MR = 80 - .0016Q </li></ul><ul><li>TC = 10,000 + .0092Q 2 ; MC = .0184 Q </li></ul><ul><li>Set MR = MC  Q = 4000; P = 76.8 </li></ul><ul><li>Profit = 307,200 – 147,200 – 10,000 = 150,000 </li></ul><ul><li>Profit = (P- ATC). Q </li></ul>
  18. 18. Things Change <ul><li>Demand may go down </li></ul><ul><li>Cost could increase </li></ul><ul><li>In an attempt to keep the potential competitors out, the monopolist may lower its price to near its average cost </li></ul><ul><li>Rent seeking: an attempt to maintain its monopolistic position by influencing the political processes-e.g., zoning laws </li></ul><ul><li>Closer substitutes may emerge </li></ul>
  19. 19. SMC SATC D MR P Qe Q $ o LATC L-R Zero Economic Profit ATC>MC, P>MR, P>MC, P = ATC
  20. 20. The Case of Natural Monopolies <ul><li>A natural monopoly emerges out of competition among firms in an industry with extensive economies of scale; the downward-sloping segment of the LATC curve extends to or beyond the market capacity (or market demand). </li></ul><ul><li>Smaller firms are gradually driven out by the larger (more efficient) firms. </li></ul><ul><li>The surviving firm would become a (natural) monopoly. </li></ul><ul><li>If unchecked, a natural monopoly behaves like a monopoly; it under-produces and overcharges. </li></ul>
  21. 21. SAC 1 SAC 2 SAC 3 o Q $ D Natural Monopolies LAC Q1 Q2 Q3
  22. 22. SAC o Q $ D Natural Monopolies Monopoly Pricing LATC MR SMC LMC Pm Qc Qm AC p
  23. 23. MC Q o Pc Pm Qm Qc A Comparison D MR $
  24. 24. Price Discrimination <ul><li>Segmenting the market into separate classifications or regions </li></ul><ul><li>Assuming that each class of consumers have different demand, a monopoly can charge different prices in each market segment </li></ul><ul><li>To price-discriminate </li></ul><ul><li>The firm must identify consumer groups/classes with different downward-sloping demand curves </li></ul><ul><li>The firm must be able to prevent consumers of one class from reselling its product to the consumers of another class; no intermarket redistribution of the product is allowed </li></ul>
  25. 25. $ D MR D` MR MC, ATV o Q Q P` P Q Q Price Discrimination
  26. 26. Monopsony vs. Monopoly MRPL:D L MR L MC L S L Wu o Eu Ec Wc Wm Em
  27. 27. Cartels Q Industry Σ MC Dm MR P,C P,C P o o Firm A Firm B o Q B Q A MC A MC B ATC A ATC B P,C

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