Comp mono
Transcript of Comp mono
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 0Q Q
Dm
Smo
po
p1
Sm1
Do
D1
S
qoq1
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
0Q
$
SMC
SATC
AVC
Pm
ab
c
Qe
Df, 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
0Q
$
SMC
SATC
AVC
Pmc Df , MR
Smo
Qm
Pm1
Pm2
Pm3
Pm4
Sm1Sm2
Sm3Sm4
Q4 Q3 Q2 Q1 Qo
$
MARKETo
Dm
LATC
DPm
Qe
Qo
SAC1
SAC2
SAC3
SAC4
A competitive firm’s long-run equilibrium
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
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
$
DmMR0
0
TR
a-2b
-b
Demand Faced by A Monopoly
SMC
SATC
D
MR
P
Qe
Q
$
k
mn
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
LATCk
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 + .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
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.
SAC1
SAC2
SAC3
o Q
$
D
Natural Monopolies
LAC
Q1 Q2 Q3
SAC
o Q
$
D
Natural Monopolies Monopoly Pricing
LATC
MR
SMC
LMC
Pm
QcQm
AC
p
MC
Qo
Pc
Pm
Qm Qc
A Comparison
DMR
$
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
MRD`
MR
MC, ATV
oQ Q
P`
P
Q Q
Price Discrimination
Monopsony vs. Monopoly
MRPL:DL
MRL
MCL
SLWu
o Eu Ec
Wc
Wm
Em
Cartels
Q
Industry
ΣMC
Dm
MR
P,C P,C
P
o o
Firm A Firm B
oQBQA
MCA
MCB
ATCA
ATCB
P,C