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Comp mono

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