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market structure
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number of suppliers, forms of competition among firms
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decision: how to produce and what price to charge
objective: maximize profit
objective: maximize profit
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What is a firms decision and objective?
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perfect competition
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many buyers and sellers, firms sell a commodity (standardized product), fully informed buyers and sellers, no barriers of entry
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demand: marginal benefit
supply: marginal cost
supply: marginal cost
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what is demand and supply in perfect competition?
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market price
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determined by intersection of supply and demand curve, *demand curve is always downward sloping
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horizontal, perfectly elastic
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what does the price/demand curve look like for perfect competition?
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price taker
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firm that faces a given market price, quantity supplied has no effect on that price
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short-run profit maximization
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maximize economic profit by finding quantity at which total revenue exceeds total cost by the greatest amount
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TR - TC = Profit
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how do you calculate profit in perfect competition?
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economic profit: TR > TC
economic loss: TR < TC also P < ATC
economic loss: TR < TC also P < ATC
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what is economic profit and loss in perfect competition?
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marginal revenue
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change in total revenue from selling another unit of output, should equal price in perfect competition
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average revenue
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total revenue divided by quantity
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increase production as long as each additional unit adds more to TR than to TC
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how do you maximize economic profit?
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produce where MR = MC
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what is the golden rule of profit maximization?
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loss minimizing condition
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ATC < P > AVC
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P < minimum average variable cost
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what is a shutdown decision?
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short run firm supply curve
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how much firm's supply in the short run, upward sloping portion of a firm's MC curve above the lowest point on AVC curve
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short run industry supply curve
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quantity supplied by industry at each price on short run, horizontal sum of all firms short run supply curves
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long run under perfect competition
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market supply increases (price decreases, economic profit disappears, firm break even)
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more firms will enter market, supply increases, supply shifts to the right and price falls, profit disappears
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what happens when a perfect competitive firm makes economic profit in the long run?
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go out of business, EXIT
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price that goes below ATC in the long run
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constant cost industry
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cost/price did not change, price of labor and raw materials did not change but demand and supply increased = price of items did not change
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productive efficiency
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making stuff right, involves producing output at the least possible cost
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allocative efficiency
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making the right stuff, involves producing output that consumers value most
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consumer surplus
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consumers pay less that what they are willing to pay, area above marketing price and below demand
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producer surplus
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market price exceeds cost of production, area below market price and above supply
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social welfare
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consumer surplus and producer surplus, maximized when the marginal cost of production = marginal benefit to consumers
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minimum average cost
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what is long run and short run equilibrium equal to?
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monopoly
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sole supplier of a product with no close substitutes, marginal revenue is always less that price
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barrier of entry
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any impediment that prevents new firms from entering an industry and competing on an equal basis of existing firms
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legal restrictions, economies of scale, control of essential resources
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what are barriers of entry for monopoly?
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- downward sloping, law of demand
- lowers the price of all units to sell more
- P = AR = TR/Q
- P > MR = change in TR/change in Q
- allocative efficiency
- lowers the price of all units to sell more
- P = AR = TR/Q
- P > MR = change in TR/change in Q
- allocative efficiency
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what are factors of a monopolist?
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have to lowers all units not just the last one to sell products
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why in a monopoly is the MR less than price?
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deadweight loss of monopoly
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net loss to society, when a firm with market power restricts output and increases the price, little triangle on graph comparing monopoly and PC
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price discrimination
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charging different groups of consumers different prices for the same product, increases profit, when two different groups have two different elasticities
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perfect price discrimination
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charging a different price for each unit sold
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- demand curve becomes MR curve
- consumer surplus gets converted to economic profit
- no deadweight loss
- consumer surplus gets converted to economic profit
- no deadweight loss
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factors of perfect price discrimination
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deadweight/welfare loss
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amount of consumer surplus that is not regained by monopolist
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$0.95, MR = change in total revenue / change in Q
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Assume a monopolist was selling 20 units at a price of $2 and to sell 21 units, the price must be lowered to $1.95 per unit, Marginal revenue for this monopoly is equal to...
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profit per unit
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difference between price and ATC
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total profit
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difference between price and AVC
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monopolistic competition
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many producers, low barriers of entry, slightly different products, if they raise prices that might loose consumers to rivals, some control over price makers, firm acts interdependently
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product differentiation
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physical differences in appearance or quality, location (spatial differentiation)
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services
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quality and range of accompanying services
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product image
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promotion and advertising to maintain and create brand loyalty
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short run economic profit in monopolistic competition
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new firms enter the market, draw customers away from existing firms, profit disappears in long run for other firms, zero economic profit in long run (like PC)
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short run economic loss in monopolistic competition
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some firms exit the market, their customers switch to the remaining firms, loss is erased in the long run, zero economic profit in long run
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long-run equilibrium in monopolistic competition
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price equals ATC
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- zero economic profit in the long run
- MR equals MC in equilibrium quantity
- MR equals MC in equilibrium quantity
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how are MC and PC similar?
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monopolistic competition firms
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produce less and charge more
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MC: P equals ATC
PC: P equals minimum TC
PC: P equals minimum TC
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how are MC and PC different in the long run?
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excess capacity
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difference between average cost and minimum cost, cost is higher that PC
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oligopoly
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just a few firms, no single firm can ignore changes in other firms (constant competition), each firm is interdependent / cooperation
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interdependence, cooperation, collusion, price leadership (one dominant firms sets price), game theory (what will be your reaction to your rivals price decisions)
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what are the approaches to oligopoly?
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collusion
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agreement amongst firms to increase economic profit by dividing the market or fixing the price
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cartel
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group of firms that agree to coordinate their production and pricing decisions to reap economic profit
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duopoly
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market with only two members
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prisoners dilemma
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two prisoners get caught and asked to confess, many different scenarios that could result in different outcomes, both don't confess then no jail time
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prisoners dilemma and game theory
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firms will both not do something and benefit
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kinked demand theory
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two demand curves because of price increase and decrease, also two marginal revenue curves
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lowers: the rest lowers the price = TR will fall and demand is inelastic because everyone lowers price
raises: no one follows = TR falls and demand is more elastic, people just switch to another firm
raises: no one follows = TR falls and demand is more elastic, people just switch to another firm
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what happens is a firm lowers or raises the price of products in kinked demand theory?
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