Economics 2
If a monopolist raises its price
- some consumers will choose not to purchase its product -but they will then need to buy a completely different product.
East india company and confederate states were monopolies.
-Boston tea parts -Great britain was neutral in the civil war.
Laundry detergent and bags of ice
-Seem pretty mundane -have been the center of clandestine meetings and secret deals worthy of a spy novel.
If a firm's produces a producer without close subsidies they consider the firm a monopoly producer.
-argument of what is a substitute or not is controversial. -if buyers have a range of similar products, then the firm isn't an monopoly.
What portents innovation?
-article 1 section 8 of the constitution protects innovation. -congress creates patent, trademark and copyright offices.
Natural monopoly
-barriers to entry aren't legal in nature
Characteristics of a monopoly
-faces no significant competition -can charge
What is a hypothetical benchmark?
Perfect competition, in the long run, is a hypothetical benchmark
Utilities were dependent on tech
Telephone used to be wire, now seattle so at and t loses monopoly
characterize oligopolies
We characterize oligopolies by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit-maximizing level of output.
What can we consider a monopoly?
We consider Microsoft, for instance, as a monopoly because it dominates the operating systems market.
Predatory pricing
When firm uses price cuts against customers divided by business to create barriers to entry - A big airline slashes prices temporarily to drive out a small airline.If this pattern is repeated the small airline can't compete. -2015 justice department ruled against american express for predatory pricing. -huge advertising budgets difficult to stop brand name.
When are economic profits zero?
When price is equal to average cost, economic profits are zero
If one monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market.
- A gas station with a great location must worry that other gas stations might open across the street or down the road - perhaps the new gas stations will sell coffee or have a carwash or some other attraction to lure customers. -A successful restaurant with a unique barbecue sauce -must be concerned that other restaurants will try to copy the sauce - or offer their own unique recipes -A laundry detergent with a great reputation for quality -must take note that other competitors may seek to build their own reputations.
] economists and business owners have also long suspected that much of the advertising may only offset other advertising.
- Economist A. C. Pigou wrote the following back in 1920 in his book, The Economics of Welfare: -It may happen that expenditures on advertisement made by competing monopolists [that is, what we now call monopolistic competitors] will simply neutralise one another, and leave the industrial position exactly as it would have been if neither had expended anything. -If each of two rivals makes equal efforts to attract the favour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all.
Allocative efficiency means that among the points on the production possibility frontier, the chosen point is socially preferred
- In a perfectly competitive market, price will be equal to the marginal cost of production. -the buyer pays what is willing to pay what is worth to the firm - the price that a buyer pays is the social benefit they'd receive for a good. -marginal cost represent not only cost to the firm, but the social cost of good production Perfectly competitive firms follow the rule that profits are maximized by producing at the quantity where price is equal to marginal cost, -They ensure that the social benefits they receive from producing a good are in line with the social costs of production.
Intangible aspects can differentiate a product, too.
- Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product. - product differentiation may occur in the minds of buyers. -many people could not tell the difference in taste between common varieties of ketchup or mayonnaise if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands -. Advertising can play a role in shaping these intangible preferences.
Over 1800 golf balls made by more than 100 companies meet the USGA standards.
- The balls do differ in various ways, such as the pattern of dimples on the ball, the types of plastic on the cover and in the cores, and other factors. -Since all balls need to conform to the USGA tests, they are much more alike than different. - In other words, golf ball manufacturers are monopolistically competitive. -However, retail sales of golf balls are about $500 million per year, which means that many large companies have a powerful incentive to persuade players that golf balls are highly differentiated and that it makes a huge difference which one you choose. - Tiger Woods can tell the difference. -For the average amateur golfer who plays a few times a summer—and who loses many golf balls to the woods and lake and needs to buy new ones—most golf balls are pretty much indistinguishable.
We use the combinations of price and quantity at each point on a firm's perceived demand curve to calculate total revenue for each combination of price and quantity.
- We then use this information on total revenue to calculate marginal revenue, - which is the change in total revenue divided by the change in quantity.
nlike a monopoly, with its high barriers to entry, a monopolistically competitive firm with positive economic profits will attract competition.
- When another competitor enters the market, -the original firm's perceived demand curve shifts to the left, from D0 to D1, -and the associated marginal revenue curve shifts from MR0 to MR1. -The new profit-maximizing output is Q1, because the intersection of the MR1 and MC now occurs at point U. - Moving vertically up from that quantity on the new demand curve, the optimal price is at P1.
The U.S. economy spent about $180.12 billion on advertising in 2014, according to eMarketer.com. -Roughly one third of this was television advertising
- and another third was divided roughly equally between internet, newspapers, and radio. - The remaining third was divided between direct mail, magazines, telephone directory yellow pages, and billboards. -Mobile devices are increasing the opportunities for advertisers.
Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions
- both a monopolist and a monopolistic competitor face downward-sloping demand curves -the monopolist's perceived demand curve is the market demand curve - the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces.
Monopoly sellers often see no threats to their superior marketplace position.
- did the power of the monopoly blind the decision makers to other possibilities -monopolies helped history to unfold in different ways.
Monopolistic competition refers to an industry that has more than a few firms
- each offering a product which, from the consumer's perspective, is different from its competitors.
in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve,
- not at the very bottom of the AC curve. -Thus, monopolistic competition will not be productively efficient.
As an example of a profit-maximizing monopolistic competitor, consider the Authentic Chinese Pizza store,
- serves pizza with cheese, sweet and sour sauce -and your choice of vegetables and meats. - Authentic Chinese Pizza must compete against other pizza businesses and restaurants, it has a differentiated product. -The firm's perceived demand curve is downward sloping, as Figure 10.3 shows and the first two columns of Table 10.1.
What happens when profit maximizing firms combined with utility maximizers?
- the resulting quantities of outputs of goods and services demonstrate both productive and allocative efficiency -firms produce without waste, so on the production possibilities frontier. -firms produce and sell goods at the lowest average cost. -In the long run,equal to the minimum of the long-run average cost curve
These two cases provide examples of markets that are characterized neither as perfect competition nor monopoly.
- these firms are competing in market structures that lie between the extremes of monopoly and perfect competition
Economists have struggled, with only partial success,
- to address the question of whether a market-oriented economy produces the optimal amount of variety. Critics of market-oriented economies argue - that society does not really need dozens of different athletic shoes or breakfast cereals or automobiles. - They argue that much of the cost of creating such a high degree of product differentiation, and then of advertising and marketing this differentiation, is socially wasteful—that is, most people would be just as happy with a smaller range of differentiated products produced and sold at a lower price.
oligopolistic firms, which face two conflicting temptations
- to collaborate as if they were a single monopoly, -to individually compete to gain profits by expanding output levels and cutting prices. - Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition.
Even though monopolistic competition does not provide productive efficiency or allocative efficiency, it does have benefits of its own
-. Product differentiation is based on variety and innovation. -Most people would prefer to live in an economy with many kinds of clothes, foods, and car styles; not in a world of perfect competition where everyone will always wear blue jeans and white shirts, eat only spaghetti with plain red sauce, and drive an identical model of car. -Most people would prefer to live in an economy where firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience.
The monopolistically competitive firm decides on its profit-maximizing quantity and price in much the same way as a monopolist.
-A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve. - it will choose some combination of price and quantity along its perceived demand curve.
The entry of other firms into the same general market (like gas, restaurants, or detergent) shifts the demand curve that a monopolistically competitive firm faces.
-As more firms enter the market, the quantity demanded at a given price for any particular firm will decline, - the firm's perceived demand curve will shift to the left. -As a firm's perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too. -The shift in marginal revenue will change the profit-maximizing quantity that the firm chooses to produce -since marginal revenue will then equal marginal cost at a lower quantity.
Profit maximizing cost and quantity for a monopolist
-Can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit. -If the marginal revenue exceeds the marginal cost, then the firm should produce the extra unit.
deregulation Eliminated government restrictions on
-Firms could enter -Prices firms could charge -quantities industry could produce Many countries governments limited control in in key industries Examples telephones, banking steels and airlines.
Perfect competition
-Firms have no market powers -firms just respond to market price
Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering.
-First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, -the monopolist's perceived demand curve is the market demand curve, -while the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces. - Second, a monopolist is surrounded by barriers to entry and need not fear entry, -but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.
A firm's location can also create a difference between producers.
-For example, a gas station located at a heavily traveled intersection can probably sell more gas, because more cars drive by that corner. - A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory.
The top five Midwest ice makers (Home City Ice, Lang Ice, Tinley Ice, Sisler's Dairy, and Products of Ohio) had similar goals in mind when they secretly agreed to divide up the bagged ice market.
-If both groups could meet their goals, it would enable each to act as though they were a single firm—in essence, a monopoly—and enjoy monopoly-size profits.
The concept of differentiated products is closely related to the degree of variety that is available.
-If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. -The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition.
What was the issue with the ice and detergent makers?
-In many parts of the world, including the European Union and the United States, it is illegal for firms to divide markets and set prices collaboratively.
Total revenue is different a monopolist faces a downward curve
-Monopoly faces a downward curve it can only sell input by reducing its price -selling more input rises revenue but lowering it reduced it. -shape of total revenue isn't clear. -total revenue of a monopoly is like a hill, rising falling and then falling
Defenders of a market-oriented economy respond that if people do not want to buy differentiated products or highly advertised brand names, no one is forcing them to do so.
-Moreover, they argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products.
Natural monopoly:economies of scale are large compared to quantity demanded.
-Once fixed costs happens, marginal cost is lower Example electricity or plumbing -Costs a lot to put line of pipe in or electrical wires, but it's easy to service customers once that happens.
When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name.
-Still, firms producing such products must also compete with other styles and flavors and brand names. The term "monopolistic competition" captures this mixture of mini-monopoly and tough competition.
The adjustment to long-run equilibrium is analogous to the previous example.
-The economic losses lead to firms exiting, which will result in increased demand for this particular firm, and consequently lower losses.
Figure 10.4 (a) shows a situation in which a monopolistic competitor was earning a profit with its original perceived demand curve (D0).
-The intersection of the marginal revenue curve (MR0) and marginal cost curve (MC) occurs at point S, corresponding to quantity Q0, -which is associated on the demand curve at point T with price P0. -The combination of price P0 and quantity Q0 lies above the average cost curve, -which shows that the firm is earning positive economic profits.
The U.S. Golf Association runs a laboratory that tests 20,000 golf balls a year.
-There are strict rules for what makes a golf ball legal. -A ball's weight cannot exceed 1.620 ounces and its diameter cannot be less than 1.680 inches (which is a weight of 45.93 grams and a diameter of 42.67 millimeters, in case you were wondering). The Association also tests the balls by hitting them at different speeds -. For example, the distance test involves having a mechanical golfer hit the ball with a titanium driver and a swing speed of 120 miles per hour. A -s the testing center explains: "The USGA system then uses an array of sensors that accurately measure the flight of a golf ball during a short, indoor trajectory from a ball launcher. - From this flight data, a computer calculates the lift and drag forces that are generated by the speed, spin, and dimple pattern of the ball. ... The distance limit is 317 yards."
What about the vast majority of real world firms and organizations that fall between these extremes, firms that we could describe as imperfectly competitive
-They have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly. W
In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short and long run. '
-This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production.
The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve.
-This outcome is why perfect competition displays productive efficiency: goods are produced at the lowest possible average cost.
A change in perceived demand will change total revenue at every quantity of output and in turn, the change in total revenue will shift marginal revenue at each quantity of output.
-Thus, when entry occurs in a monopolistically competitive industry, -the perceived demand curve for each firm will shift to the left, - because a smaller quantity will be demanded at any given price. - Another way of interpreting this shift in demand is to notice that, for each quantity sold, the firm will charge a lower price.
Patent:gives the inventor an exclusive right to make or sell their invention.
-US patents can last for for 20. -this is so firms can recoup their r and d costs, but once patents expire firms can cheaply produce their products.
Natural monopoly from control scare resources
-aluminum company. ALOA controlled most of the worlds buximate. Other firms couldn't compete. De Beers diamond corporation -Increased competition, but experiences significant holds diamond market.
perfectly competitive firms maximize their profits by producing the quantity where P = MC
-assure that the benefits to consumers of what they are buying, as measured by the price they are willing to pay, is equal to the costs to society of producing the marginal units, as measured by the marginal costs the firm must pay -thus that allocative efficiency hold
Barriers to entry might lead to a monopoly or lowered competition
-blocks entry even if firms are profitable makes it so that high profits won't attract more firms so -prices won't decline so firms only earn normal profit over the long run.
a monopolist is surrounded by barriers to entry and need not fear entry
-but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.
Monopolistic competitors can make an economic profit or loss in the short run,
-but in the long run, entry and exit will drive these firms toward a zero economic profit outcome. -However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways relating both to efficiency and to variety in the market.
Perfect competition acts as a price taker
-can calculate total revenue by taking market price and multiplying it by output -flat value means that the item could sell for low or high.
Trademarks: identifying symbol or name for good.
-chiquitos,chevys or the nike swoosh -1.9 million registered -can be repeatedly renewed if it's still actively used.
Innovation takes time and resources
-company r and d costs money for drugs -without r and d there would be no innovation
A monopolistically competitive industry
-does not display productive -or allocative efficiency in either the short run, when firms are making economic profits and losses, -nor in the long run, when firms are earning zero profits.
1947 federal government accused of a Depoint monopoly on the cellphone market
-dupont produced 47 percent of the cellophane market -dupont countered that they had 75 percent of the cellophane market, but less than 25 percent of the flexible packaging materials market. -the us supreme court upheld this broad definition -the case against dupont was dismissed.,
We should view the statements that a perfectly competitive market in the long run will feature both productive and allocative efficiency with a degree of skepticism .
-economists are using the concept of "efficiency" in a particular and specific sense, -It isn't a synonym for "desirable in every way -consumers' ability to pay reflects the income distribution in a particular sociey -a homeless person may have no ability to pay for housing because he or she has insufficient income
In the framework of monopolistic competition, there are two ways to conceive of how advertising works:
-either advertising causes a firm's perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper) - advertising causes demand for the firm's product to increase (that is, it causes the firm's perceived demand curve to shift to the right). -, a successful advertising campaign may allow a firm to sell either a greater quantity or to charge a higher price, or both, and thus increase its profits.
In real life a monopolist can't analyse its total revenue and costs curves '
-firm has no idea what would happen if they altered production dramatically -from experience with changes a monopolist knows about moderate to small changes with marginal revenues and marginal costs, -a monopolist can utilize information on marginal revenue and marginal costs to understand the profit maximizing combination of quantity and price.
In 2010, the Mall of America:Example of monopolistic competition.
-had 24 stores that sold women's "ready-to-wear" clothing (like Ann Taylor and Urban Outfitters), -another 50 stores that sold clothing for both men and women (like Banana Republic, J. Crew, and Nordstrom's), -14 more stores that sold women's specialty clothing (like Motherhood Maternity and Victoria's Secret). Most of the markets that consumers encounter at the retail level are monopolistically competitive.
What is a monopoly concerned about?
-if a customer will purchase their products. - competing firms
This market-oriented economycontroversy may never be fully resolved,
-in part because deciding on the optimal amount of variety is very difficult, - and in part because the two sides often place different values on what variety means for consumers. Read the following Clear It Up feature for a discussion on the role that advertising plays in monopolistic competition.
Examples of monopolistic competition
-include stores that sell different styles of clothing; -restaurants -grocery stores that sell a variety of food -even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. -There are over 600,000 restaurants in the United State
real-world markets include many issues that are assumed away in the model of perfect competition,
-including pollution -inventions of new technology -poverty which may make some people unable to pay for basic necessities of life, - government programs like national defense or education, discrimination in labor markets, and buyers and sellers who must deal with imperfect and unclear information. -the theoretical efficiency of perfect competition does provides a useful benchmark for comparing the issues that arise from these real-world problems.
If a monopolistic competitor raises its price,
-it will not lose as many customers as would a perfectly competitive firm, -but it will lose more customers than would a monopoly that raised its prices.
Legal monopoly: The government makes the barriers. They prohibit and limit competition.
-it's illegal for anyone , but the postal service to deliver mail -Utilities are a great example, elective, garbage company or water conampy. -Social beneficial so government allows monopolies. -one provider due to economies of scale.
Legal monopoly
-laws prohibit competition Economies of scale can combine with market size to limit competition
What happens when firms produce a greater level of output, then when P-mc
-marginal costs of production will have increased so that P < MC. -the marginal costs of producing additional flowers is greater than the benefit to society as measured by what people are willing to pay -since the costs are outstripping the benefits, it will make sense to produce a lower quantity of such goods.
What would happen if the flower market produced a worse quantity of flowers?
-marginal costs will not yet have increased as much, so that price will exceed marginal cost; that is, P > MC - the benefit to society as a whole of producing additional goods, as measured by the willingness of consumers to pay for marginal units of a good, would be higher than the cost of the inputs of labor and physical capital needed to produce the marginal good -the gains to society as a whole from producing additional marginal units will be greater than the costs.
Let's look at an example of allocative efficiency
-market for wholesale flowers is perfectly competitive, and so P = MC.
Natural monopoly
-market has only room for one producer -if a second firm decides to enter costs will be high, the frim can't compete -even with a larger size, the costs will be lower, but market demand isn't sufficient enough.
Questions over how a monopoly is defined continue today.
-microsoft had a dominant share of the computer market. However form software services from games to scientific programs, microsoft only had a 20 percent share. -Google has a monopoly on intercity bus stations. This is a small market share if the market includes private cars, airplane and railroads
Questions over how a monopoly is defined continue today.
-microsoft had a dominant share of the computer market. However form software services from games to scientific programs, microsoft only had a 20 percent share. -Google has a monopoly on intercity bus stations. This is a small market share if the market includes private cars, airplane and railroads De Beers has a diamond monopoly However their control of the gemstone market is low and even lower for jewelry. -A small town only has one gas station.
Marginal Revenue can be zero
-monopolist can sell a large amount and have a decline revenue - When a monopolist increases sales by one unit, it gains some marginal revenue from selling that extra unit. -the monopolist loses some marginal revenue because it must now sell every other unit at a lower price. -as quantity sold becomes higher he drop in price is higher than the amount sold. So sales brings in less revenue. -marginal revenue is negative,
As long as the firm is earning positive economic profits
-new competitors will continue to enter the market - reducing the original firm's demand and marginal revenue curves.
A monopolist can charge anything but demand for the firm's product constrains the price.
-no monopolist ran require consumers to buy their products. -monopoly demand curve is the same as the market curve -unlike perfect competition a monopoly is downward sloping
Could a break up of the cotton monopoly stopped the civil war?
-one in five jobs in britain depended on southern cotton -britain drew on cotton reserves -Britain expanded cotton imports from India, Egypt, and Brazil -United kingdom didn't recognize the confederacy because of slavery.
We can illustrate demand with a graph of total revenues and costs
-our example is the health pill firm -this total cost curve has the shape where total costs rises and the curve grows steeper as the output rises.
A firm can try to make its products different from those of its competitors in several ways:
-physical aspects of the product, location from which it sells the product, -intangible aspects of the product, -perceptions of the produc
Barriers to entry:
-prohibate competitors from legal entering the market. -restrictive or easy to overcome -Example of a barrier to entry, a radio station. The radio frequencies can only have one station.
Thus, although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive down economic profits to zero in the long run.
-remember that zero economic profit is not equivalent to zero accounting profit. -A zero economic profit means the firm's acc ounting profit is equal to what its resources could earn in their next best use.
In contrast, the demand curve, as faced by a monopolist, is the market demand curve,
-since a monopolist is the only firm in the market -hence is downward sloping. - that the monopolistic competitor can raise its price without losing all of its customers - lower the price and gain more customers. '
Could a legal tea trade have stopped the American revolution?
-smuggled dutch tea in the colonial market -they would have paid lower prices and avoided the tax.
However, when a monopolistic competitor raises its price
-some consumers will choose not to purchase the product at all -others will choose to buy a similar product from another firm.
since there are substitutes
-the demand curve facing a monopolistically competitive firm is more elastic - differs from a monopoly where there are no close substitutes.
Monopoly seeks to maximize the highest profit, not the revenue
-the highest profit will occur at the quantity where total revenue is the farthest above total cost.
In figure 9.3
-the monopolist can either choose .pont r with low price and or a point with a high price and low quantity. -Setting the price high will means few sales and not a lot of revenue -selling the price low could mean a high amount sold, but not alot of revenue due to the price. -a monopolist must set a profit maximizing balance between price and quantity. -this is similar to a firm with perfect competition
In a monopolistically competitive market,
-the rule for maximizing profit is to set MR = MC—and -price is higher than marginal revenue, not equal to it because the demand curve is downward sloping. When P > MC, which is the outcome in a monopolistically competitive market - the benefits to society of providing additional quantity, as measured by the price that people are willing to pay, exceed the marginal costs to society of producing those units.
At a glance, the demand curves that a monopoly and a monopolistic competitor face look similar—that is, they both slope down.
-the underlying economic meaning of these perceived demand curves is different, because a monopolist faces the market demand curve and a monopolistic competitor does not. - a monopolistically competitive firm's demand curve is but one of many firms that make up the "before" market demand curve.
The difference between perceived demand and market demand is different form overall market demand
-they think about demand in a market with other firms -perfect competition demand as perceived is a tiny part of the demand curve -a monopoly think about demand where it's the only producer.
Physical aspects of a product include all the phrases you hear in advertisements:
-unbreakable bottle, - nonstick surface, -freezer-to-microwave, -non-shrink, - extra spicy, -newly redesigned for your comfort.
A monopolistically competitive firm does not produce more,
-which means that society loses the net benefit of those extra units. -This is the same argument we made about monopoly, but in this case the allocative inefficiency will be smaller. -a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry.
Did the monopiles have unintended consequences?
-would the American revolution happened without the tea ships. -Would the civil war happen without the power of King cotton. -we can consider the monopolies and how they had an impact on historical events.
what happens for exit and entry for a monopolistic firm?
. Consequently, the marginal revenue will be lower for each quantity sold—and the marginal revenue curve will shift to the left as well. Conversely, exit causes the perceived demand curve for a monopolistically competitive firm to shift to the right and the corresponding marginal revenue curve to shift right, too.
oligopoly:
: are those which a small number of firms dominate. -The other type of imperfectly competitive market
Trade Secrets
: even if no patient or law, other companies can't steal -new software -the formula for coca cola.
Monopolistic competition
:involves many firms competing against each other, but selling products that are distinctive in some way.
Intellectual property
A combination of patients, trademarks and copyrights. -enacted everywhere around the world. -ownership over an idea not psychical -international
A Dime a Dozen
A quick glance at Table 8.12 reveals the dramatic increase in North Dakota corn production—more than double. Taking into consideration that corn typically yields two to three times as many bushels per acre as wheat, it is obvious there has been a significant increase in bushels of corn. Why the increase in corn acreage? Converging prices. Year Corn (millions of acres) Wheat (millions of acres) 2014 91.6 56.82 Table8.12 (Source: USDA National Agricultural Statistics Service) Historically, wheat prices have been higher than corn prices, offsetting wheat's lower yield per acre. However, in recent years wheat and corn prices have been converging. In April 2013, Agweek reported the gap was just 71 cents per bushel. As the difference in price narrowed, switching to the production of higher yield per acre of corn simply made good business sense. Erik Younggren, president of the National Association of Wheat Growers said in the Agweek article, "I don't think we're going to see mile after mile of waving amber fields [of wheat] anymore." (Until wheat prices rise, we will probably be seeing field after field of tasseled corn.)
Adervertising-
Advertising is all about explaining to people, or making people believe, that the products of one firm are differentiated from another firm's products.
One producer can serve the market, so less investments. ,.
Can also arise in small local markets because objects are hard to transport. For example the cement market -cement production quantity in one area -the costs of transporting cement are high
One producer can serve the market, so less investments.
Can also arise in small local markets because objects are hard to transport. For example the cement market -cement production quantity in one area -the costs of transporting cement are high,.
Examples of oligopolies:
Commercial aircraft provides a good example of an oligopoly : Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. -Another example is the U.S. soft drink industry, which Coca-Cola and Pepsi dominate.
Regulation more common in the past
Examples of past regulation -bank companydesposttes -destination airlines where they fly -a t and t was the only one allowed to offer phone service
imonopolistic competition.
Feature a large number of competing firms, but the products that they sell are not identical.
Firms exit
Firms exit up to the point where there are no more losses in this market, for example when the demand curve touches the average cost curve, as in point Z.
Figure 9.4 Total Revenue and Total Cost for the .
HealthPill Monopoly Total revenue for the monopoly firm called HealthPill first rises, then falls. Low levels of output bring in relatively little total revenue, because the quantity is low. High levels of output bring in relatively less revenue, because the high quantity pushes down the market price. The total cost curve is upward-sloping. Profits will be highest at the quantity of output where total revenue is most above total cost. The profit-maximizing level of output is not the same as the revenue-maximizing level of output, which should make sense, because profits take costs into account and revenues do not
How a Monopolistic Competitor Determines How Much to Produce and at What Price
How a Monopolistic Competitor Determines How Much to Produce and at What Price The process by which a monopolistic competitor chooses its profit-maximizing quantity and price resembles closely how a monopoly makes these decisions process. First, the firm selects the profit-maximizing quantity to produce. Then the firm decides what price to charge for that quantity. Step 1. The monopolistic competitor determines its profit-maximizing level of output. In this case, the Authentic Chinese Pizza company will determine the profit-maximizing quantity to produce by considering its marginal revenues and marginal costs. Two scenarios are possible: If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then the firm should keep expanding production, because each marginal unit is adding to profit by bringing in more revenue than its cost. In this way, the firm will produce up to the quantity where MR = MC. If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit is costing more than the revenue it brings in, and the firm will increase its profits by reducing the quantity of output until MR = MC. In this example, MR and MC intersect at a quantity of 40, which is the profit-maximizing level of output for the firm. Step 2. The monopolistic competitor decides what price to charge. When the firm has determined its profit-maximizing quantity of output, it can then look to its perceived demand curve to find out what it can charge for that quantity of output. On the graph, we show this process as a vertical line reaching up through the profit-maximizing quantity until it hits the firm's perceived demand curve. For Authentic Chinese Pizza, it should charge a price of $16 per pizza for a quantity of 40. Once the firm has chosen price and quantity, it's in a position to calculate total revenue, total cost, and profit. At a quantity of 40, the price of $16 lies above the average cost curve, so the firm is making economic profits. From Table 10.1 we can see that, at an output of 40, the firm's total revenue is $640 and its total cost is $580, so profits are $60. In Figure 10.3, the firm's total revenues are the rectangle with the quantity of 40 on the horizontal axis and the price of $16 on the vertical axis. The firm's total costs are the light shaded rectangle with the same quantity of 40 on the horizontal axis but the average cost of $14.50 on the vertical axis. Profits are total revenues minus total costs, which is the shaded area above the average cost curve. Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering. First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, the monopolist's perceived demand curve is the market demand curve, while the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces. Second, a monopolist is surrounded by barriers to entry and need not fear entry, but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products. Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering.
What must a monopolist worry about?
If a customer will -purchase their products -spend their money on something different.
Figure 9.5
Marginal Revenue and Marginal Cost for the HealthPill Monopoly For a monopoly like HealthPill, marginal revenue decreases as it sells additional units of output. The marginal cost curve is upward-sloping. The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. If the monopoly produces a lower quantity, then MR > MC at those levels of output, and the firm can make higher profits by expanding output. If the firm produces at a greater quantity, then MC > MR, and the firm can make higher profits by reducing its quantity of output.
What defines a monopoly?
Monopoly a firms that sells all or nearly all the goods and services on the market.
In France, between 1997 and 2004, the top four laundry detergent producers (Proctor & Gamble, Henkel, Unilever, and Colgate-Palmolive) controlled about 90 percent of the French soap market.
Officials from the soap firms were meeting secretly, in out-of-the-way, small cafés around Paris. -Their goals: Stamp out competition and set prices.
Figure 9.3 The Perceived Demand Curve for a
Perfect Competitor and a Monopolist (a) A perfectly competitive firm perceives the demand curve that it faces to be flat. The flat shape means that the firm can sell either a low quantity (Ql) or a high quantity (Qh) at exactly the same price (P). (b) A monopolist perceives the demand curve that it faces to be the same as the market demand curve, which for most goods is downward-sloping. Thus, if the monopolist chooses a high level of output (Qh), it can charge only a relatively low price (PI). Conversely, if the monopolist chooses a low level of output (Ql), it can then charge a higher price (Ph). The challenge for the monopolist is to choose the combination of price and quantity that maximizes profits.
What are at two complete opposite ends of the spectrum?
Perfect competition and monopoly are at opposite ends of the competition spectrum. A perfectly competitive market has many firms selling identical products, who all act as price takers in the face of the competition.
Monopoly versus perfect competition
Profits for the monopolist like perfect competition: Total revenue minus costs -monopoly faces no competition so the situation and decisions process are different -can analyze cost patterns for a monopoly like a firm with perfect competition. * total cost, fixed cost, variable cost, marginal cost, average cost, and average variable cost.
One type of imperfectly competitive market
The Mall of America in Minnesota, the largest shopping mall in the United States. In 2010, the Mall of America:Example of monopolistic competition.
A monopolistically competitive firm: perceives a demand for its goods that is an intermediate case between monopoly and competition.
The demand curve that a perfectly competitive firm faces is perfectly elastic or flat, -the perfectly competitive firm can sell any quantity it wishes at the prevailing market pric
. The adjustment to long-run equilibrium is analogous to the previous example.
The economic losses lead to firms exiting, which will result in increased demand for this particular firm, -consequently lower losses.
Long run equilibrium
The long-run equilibrium is in the figure at point Y, where the firm's perceived demand curve touches the average cost curve
This process works without any need to calculate total revenue and total cost
Thus, a profit-maximizing monopoly should follow the rule of producing up to the quantity where marginal revenue is equal to marginal cost—that is, MR = MC. This quantity is easy to identify graphically, where MR and MC intersect.
Figure 10.3 How a Monopolistic Competitor Chooses its Profit Maximizing Output and Price
To maximize profits, the Authentic Chinese Pizza shop would choose a quantity where marginal revenue equals marginal cost, -or Q where MR = MC. -We can multiply the combinations of price and quantity at each point on the demand curve to calculate the total revenue that the firm would receive, which is in the third column of Table 10.1. -We calculate marginal revenue, in the fourth column, as the change in total revenue divided by the change in quantity. -The final columns of Table 10.1 show total cost, marginal cost, and average cost. -As always, we calculate marginal cost by dividing the change in total cost by the change in quantity, -while we calculate average cost by dividing total cost by quantity.
Who invented the theory of imperfect competition?
Two economists independently but simultaneously developed the theory of imperfect competition in 1933 -. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition. -The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition -. Robinson subsequently became interested in macroeconomics and she became a prominent Keynesian, and later a post-Keynesian economist. (See the Welcome to Economics! and The Keynesian Perspective chapters for more on Keynes.)
From the mid nineties to the 2003's the justice department prosecuted Microsoft. Windows ran on 90 percent of systems.
Why did this happen? -consumers didn't have incentives to look at other browsers - made it hard for competitors to gain a foothold in the market. However, google put their browser on the android and wasn't prosecuted
copyright
a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music
Copyright:
a form of protection for original works of authorship,like creative works. -lasts for seventy years plus a writers lifetime -can't be reproduced without the permission of the author
patent
a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time
monopoly
a situation in which one firm produces all of the output in a market
Figure 10.4 Monopolistic Competition, Entry, and Exit (
a) At P0 and Q0, the monopolistically competitive firm in this figure is making a positive economic profit. This is clear because if you follow the dotted line above Q0, you can see that price is above average cost. Positive economic profits attract competing firms to the industry, driving the original firm's demand down to D1. At the new equilibrium quantity (P1, Q1), the original firm is earning zero economic profits, and entry into the industry ceases. In (b) the opposite occurs. At P0 and Q0, the firm is losing money. If you follow the dotted line above Q0, you can see that average cost is above price. Losses induce firms to leave the industry. When they do, demand for the original firm rises to D1, where once again the firm is earning zero economic profit.
trademark
an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark
he monopoly could seek out the profit-maximizing level of output by increasing quantity by a small amount,
calculating marginal revenue and marginal cost, and then either increasing output as long as marginal revenue exceeds marginal cost or reducing output if marginal cost exceeds marginal revenue.
natural monopoly
economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition
Natural monopoly
economies of scale are large compared to quantity demanded. -Once fixed costs happens, marginal cost is lower Example electricity or plumbing -Costs a lot to put line of pipe in or electrical wires, but it's easy to service customers once that happens.
Few monopolies in existence
example of monopolies -electric -gas -the postal office
price takers
firms that have no market power. They simply have to take the market price as given.
Deregulation
happened when markets could adequately provide services
legal monopoly
legal prohibitions against competition, such as regulated monopolies and intellectual property protection m
Justice department definition monopoly:
market where firm has very high share. Defined like this by the justice department and others.
significant profits
monopolies lack of competition=significant profits.
How A monopoly differs from perfect competition
not a price taker -can choose its market price
allocative efficiency
producing the optimal quantity of some output; the quantity where the marginal benefit to society of one more unit just equals the marginal cost
differentiated products:
products that are distinctive in one of these ways
marginal profit
profit of one more unit of output, computed as marginal revenue minus marginal cost
deregulation
removing government controls over setting prices and quantities in certain industries
Natural monopoly
rom control scare resources -aluminum company. ALOA controlled most of the worlds buximate. Other firms couldn't compete. De Beers diamond corporation -Increased competition, but experiences significant holds diamond market.
intellectual property
the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions l
barriers to entry
the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market
When does a Monopoly arise? -
when a single firm sells a product for which there are no close substitutes.
predatory pricing
when an existing firm uses sharp but temporary price cuts to discourage new competition