Transcript PART III Market Structures - Econproph [Courses on Economics]

micro
Economics
Unit 8
Slide 1
Competition brings out the best in
products and the worst in people.
--David Sarnoff
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 2
Market Structures:
Degrees of Competition
Aspects
 # of firms
 Product homogeneity
 Ease of entry/exit
 Form of competition
 Info Availability
Created:
Jan 2007
by Jim Luke.
micro
Economics
Perfect Competition
Unit 8
Slide 3
Assumptions & Conditions




Created:
Jan 2007
by Jim Luke.
Many buyers and sellers
Homogeneous product
Fully informed
Easy entry & exit
micro
Economics
Some Notation
Unit 8
Slide 4
P: Price per unit
Q: quantity produced (sold)
Curves:
 MR: Marginal Revenue
 MC: marginal cost
 D: demand (tells price)
 ATC: average total cost
Formulas:
 TR=P x Q (total revenue)
 Profits = (P – ATC) x Q
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 5
Profit Maximization:
Short-Run Production Decision
Produce Q so that MR=MC
If MR > MC, then next unit
 Adds to Total Profits
 Should Be Produced
If MR < MC, then next unit
 Reduces Total Profits
 Should Not Be Produced
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 6
Created:
Jan 2007
by Jim Luke.
Profit Maximization:
Produce Q so that MR=MC
micro
Economics
Unit 8
Calculate Profits
Slide 7
After finding the Q that maximizes profits:
P – ATC = Avg Profit per unit
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 8
Profit Maximization:
All Together in 1 Graph
Marginal Cost Equals Marginal Revenue
Marginal cost
Average total cost
e
MR
Marginal revenue
Profit
Dollars per unit
a
0
Created:
Jan 2007
by Jim Luke.
micro
Economics
Minimizing Losses
Unit 8
Slide 9
In Short-Run,
 If P < ATC
 firm loses money
 If P <ATC, but
P > AVC,
 produce @ loss
 If P < AVC,
 shut-down (produce 0
units)
Created:
Jan 2007
by Jim Luke.
micro
Economics
The Market Price Constraint
Unit 8
Slide 10
Market S&D Determines P
Firm is “Price Taker”
 P = MR
Each Firm Chooses Q* where
MR=MC
If Market P Changes 
MR Changes 
Q* Must Change
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 11
Competitive Dynamics
Under Perfect Competition
Short-Run:
Profits Attract New Firms
 Supply increases
 Market Price drops
 Profits Drop
Losses Cause Exit
 Supply decreases
 Market Price increases
 Losses Reduced
Created:
Jan 2007
by Jim Luke.
Only Long Run Stable Point:
 Firms Break Even
 P = ATC
micro
Economics
Unit 8
Slide 12
Long-Run Equilibrium Under
Perfect Competition: Efficiency
Dollars per unit
Only L.R. Stable Point:
 Firms Break Even
 P = ATC
MC
ATC
LRAC
p
0
Created:
Jan 2007
by Jim Luke.
(a) Firm
e
d
q Quantity per period
micro
Economics
Monopoly Conditions
Unit 8
Slide 13



Created:
Jan 2007
by Jim Luke.
Sole Supplier of Good
No Close Substitutes and/or
Inelastic Demand
Barriers to Entry
 New Firms Not Able to
Enter Industry
micro
Economics
Barriers to Entry
Unit 8
Slide 14
Legal restrictions
 Govt. Licenses
 Patents
 Copyrights
 Restrictive Laws
Economies of scale
 “Natural Monopolies”
Control of Essential Resource
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 15
Market Demand = Monopolist’s
Demand
Slopes Downward
 Max TR @ e=1.0
 Can choose P or Q

$7,000
6,750
LOSS
Price per
Demand DeterminesDiamond
the
Other
G
A
I
N
Monopolist is Price Maker
0
Created:
Jan 2007
by Jim Luke.
3
D = Average
revenue
4
1 – carat
diamonds
per day
micro
Economics
Unit 8
Slide 16
Created:
Jan 2007
by Jim Luke.
Profit Maximization:
Simple Monopoly
micro
Economics
Simple Monopoly
Unit 8
Slide 17
Created:
Jan 2007
by Jim Luke.
Analysis:
1.
Find Q where MR=MC
2.
Find highest Price for that Q
(go up to D curve)
Results:

Likely to make short-run profit

No change over long-run

Entry barriers prevent competition
micro
Economics
Unit 8
Slide 18
Market Performance Under
Monopoly
Monopoly Results
 NOT production
efficient

not lowest ATC
 NOT Allocation
Efficient


P not equal to MC
Too little Q produced
 Deadweight loss
Created:
Jan 2007
by Jim Luke.
micro
Economics
Problems From Monopolies
Unit 8
Slide 19
Inefficient Production
Inefficient Allocation of Resource
Too little Q produced
Too high Price
Rent seeking activities
No Innovation
No Choice
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 20
Created:
Jan 2007
by Jim Luke.
Choices!
micro
Economics
Unit 8
Slide 21
Monopolistic Competition:
Conditions
 Many Small Producers

Low Concentration
 Heterogenous Products

Differentiated Substitutes
 Some Pricing Power
 Low Entry Barriers
 Sellers Act
Independently
Created:
Jan 2007
by Jim Luke.
micro
Economics
Product Differentiation
Unit 8
Slide 22
 Physical differences and
qualities
 Location
 Accompanying services
 Product image
Created:
Jan 2007
by Jim Luke.
micro
Economics
Monopolistic Competition
Unit 8
Slide 23
Differentiation Creates
“Quasi-Monopoly”
Elastic Demand &
Substitutes
 Reduces Pricing
Power
Low Barriers  Allows
Entrants
Created:
Jan 2007
by Jim Luke.
micro
Economics
Oligopoly Conditions
Unit 8
Slide 24
Few Firms - High
Concentration
Homo- or Hetero-genous
Barriers to Entry Likely




Created:
Jan 2007
by Jim Luke.
Economies of Scale
High costs of entry
Standards or Patents
Brand
micro
Economics
Board game misnamed
Unit 8
Slide 25
It should be:
oligopoly
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 26
The Oligopolist’s Constraint:
Interdependence
Market Price Depends:

Own & Competitors’
P & Q Decisions
Competitors


Are Known
Will React
Result: Strategic Behavior
 Game Theory Models
Created:
Jan 2007
by Jim Luke.
micro
Economics
Oligopoly “Games” or Models
Unit 8
Slide 27
Cartel / Collusion
 Difficult & Not Stable
Informal, Tacit Collusion
Price Leadership / Signalling
Dominant Firms
Duopoly
Game Theory Analysis
Created:
Jan 2007
by Jim Luke.
micro
Economics
Unit 8
Slide 28
People of the same trade
seldom meet together, even
for merriment and diversion,
but the conversation ends in
a conspiracy against the
public, or in some
contrivance to raise prices.

Created:
Jan 2007
by Jim Luke.
Adam Smith,
The Wealth of Nations