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Comp mono

Comp mono






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    Comp mono Comp mono Presentation Transcript

    • 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.
    • How is the market price Determined?
      • Market Supply:
      • The (horizontal) sum of individual supply curves
      • Market Demand:
      • The (horizontal) sum of individual demand curves
    • 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
    • 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
    • 0 Q $ SMC SATC AVC Pm a b c Qe D f , MR Profit Maximization in the Short Run
    • 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
    • Sm o Qm Pm1 Pm2 Pm3 Pm4 Sm 1 Sm 2 Sm 3 Sm 4 Q4 Q3 Q2 Q1 Qo $ MARKET o Dm
    • LATC D Pm Qe Q o SAC 1 SAC 2 SAC 3 SAC 4 A competitive firm’s long-run equilibrium
    • 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
    • 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
    • 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
    • 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!
    • $ Q Q $ Dm MR 0 0 TR a -2b -b Demand Faced by A Monopoly
    • SMC SATC D MR P Qe Q $ k m n o c Qc
    • 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
    • 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
    • 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
    • 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
    • SMC SATC D MR P Qe Q $ o LATC L-R Zero Economic Profit ATC>MC, P>MR, P>MC, P = ATC
    • 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.
    • SAC 1 SAC 2 SAC 3 o Q $ D Natural Monopolies LAC Q1 Q2 Q3
    • SAC o Q $ D Natural Monopolies Monopoly Pricing LATC MR SMC LMC Pm Qc Qm AC p
    • MC Q o Pc Pm Qm Qc A Comparison D MR $
    • 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
    • $ D MR D` MR MC, ATV o Q Q P` P Q Q Price Discrimination
    • Monopsony vs. Monopoly MRPL:D L MR L MC L S L Wu o Eu Ec Wc Wm Em
    • 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