comp mono
TRANSCRIPT
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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.
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How is the market price Determined?
• Market Supply:
The (horizontal) sum of individual supply curves
• Market Demand:
The (horizontal) sum of individual demand curves
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P P
0 0Q Q
Dm
Smo
po
p1
Sm1
Do
D1
S
qoq1
Market A typical firm
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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
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0Q
$
SMC
SATC
AVC
Pm
ab
c
Qe
Df, MR
Profit Maximization in the Short Run
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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
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0Q
$
SMC
SATC
AVC
Pmc Df , MR
Smo
Qm
Pm1
Pm2
Pm3
Pm4
Sm1Sm2
Sm3Sm4
Q4 Q3 Q2 Q1 Qo
$
MARKETo
Dm
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LATC
DPm
Qe
Qo
SAC1
SAC2
SAC3
SAC4
A competitive firm’s long-run equilibrium
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Long-Run Equilibrium in a Perfectly Competitive Market
o o Q
$P $
Dm
SmLATC
SATC1
SATC2
SATC3
Df
Qe
Pe
MC2
Market A typical firm
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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
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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
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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!
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$
Q
Q
$
DmMR0
0
TR
a-2b
-b
Demand Faced by A Monopoly
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SMC
SATC
D
MR
P
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Q
$
k
mn
o
c
Qc
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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
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SMC
SATC
D
MR
P
Qe
Q
$
n
o
LATCk
m
L-R Positive Economic Profit
ATC>MC, P>MR, P>MC, P>ATC
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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 + .0092Q2 ; MC = .0184 Q
Set MR = MC Q = 4000; P = 76.8
Profit = 307,200 – 147,200 – 10,000 = 150,000
• Profit = (P- ATC). Q
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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
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SMC
SATC
D
MR
P
Qe
Q
$
o
LATC
L-R Zero Economic Profit
ATC>MC, P>MR, P>MC, P = ATC
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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.
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SAC1
SAC2
SAC3
o Q
$
D
Natural Monopolies
LAC
Q1 Q2 Q3
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SAC
o Q
$
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Natural Monopolies Monopoly Pricing
LATC
MR
SMC
LMC
Pm
QcQm
AC
p
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MC
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Pc
Pm
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A Comparison
DMR
$
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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
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MC, ATV
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Price Discrimination
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Monopsony vs. Monopoly
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MRL
MCL
SLWu
o Eu Ec
Wc
Wm
Em
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Cartels
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Industry
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P,C P,C
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Firm A Firm B
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MCA
MCB
ATCA
ATCB
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