Transcript Chapter 1: Human Misery

Chapter 8:
Economics of Big Business
Market Structure
Perfect Competition
– Monopolistic Competition
– Oligapoly
Monopoly
Degree of Market Power
Concentration Ratio
– percentage of the market sale by the largest four (or
eight) firms
– CR > 0.70 indicates significant market power
Perfect Competition
Many buyers and many sellers
Homogeneous product
No barriers to enter the market
Firms are price takers:
– Market price is set by D & S
– Firms produce all they can at the market price
Profit Maximization
Business firms try to make the highest possible
profit
– Profit = Total Revenue – Total Cost
Profit is maximized when MC = MR
– MC = additional cost of producing an extra unit
– MR = additional revenue from selling an extra unit
Price-Taker Firms: P=MR=MC
Price
Market
D
Price
Firm
S
S = MC
D = MR
P
P
MC=MR
S
D
Q
Quantity
q
Quantity
Monopoly
Many buyers, but only one seller
Product maybe unique or differentiated
Barriers to enter the market
Firms are price-makers, facing the market demand
Reasons for Monopoly
Control the supply of raw materials
Investment / R&D requirements
Government licensing
Natural Monopoly
Price-Maker Firms: P>MC=MR
Price
D
MC
P
MC=MR
MC
MR
Q
D
Quantity
Perfect Competition vs. Monopoly
Monopoly price is higher than the competitive
price
Monopoly output is lower than the competitive
output
Since monopoly causes resource misallocation it
is outlawed by the Anti Trust Law
Price-Output Comparison
Price
D
Dead Weight Loss=ABC
MC
A
Pm
P=MC
C
Pc
MC=MR
B
D
MR
Qm Qc
Quantity
Pc = competitive price
Qc = competitive output
Pm = monopoly price
Qm = monopoly output
Pm>Pc but Qm<Qc
Natural Monopoly
A firm that experiences “economies of scale” so
that it operates with a declining average cost
It is less costly to have one large firm than several
small firms
Government permits natural monopoly, but
regulates its price to minimize the DW-loss
Long-run Average Cost
$ Cost
Diseconomies of scale
Economies of scale
4
1
25
100
Quantity