Chapter 8

Firms short run supply curve

the short run supply curve for a perfectly competitive firm is its marginal cost curve above the minimum point on the AVC curve

short-run output decision under perfect competition

to maximize short-run profits, a perfectly competitive firm should produce in the range of increasing marginal costs where p=MC, provided that p > AVCm if P < AVC the firm should shut down its plant to minimize costs

Marginal revenue for linear inverse demand

MR = a + 2bQ

Profit maximizing output decision

MR = MC, MR = P for a competitive firm, so: Set P = MC to maximize profits.

Monopolist's marginal revenue

MR = P [1+E/E]

monopolistic competition

Market power (often based on product differentiation) Large number of small firms acting independently Differentiated products (close, but not perfect substitutes) Market entry and exit relatively easy Non-price competition often important. Like a monopoly, monopolistically competitive firms have market power that permits pricing above marginal cost. They face a trade-off between price and quantity. But ... the presence of other brands in the market makes the demand for your brand more elastic than if you were a monopolist. Free entry and exit impacts profitability. Therefore, monopolistically competitive firms have limited market power. The Good (To Consumers) - Product Variety The Bad (To Society) - P > MC, Excess capacity, Unexploited economies of scale The Ugly (To Managers) - P = ATC > minimum of average costs. Zero Profits (in the long run)!

Monopoly

One firm controls the supply of a product. This firm faces the market demand for the product, which slopes down. To sustain a monopoly, the firm must somehow be able to restrict entry. Any firm that faces a downward-sloping demand has some market power. Monopolist can choose any combination of price and quantity on the market demand curve. To maximize profits, monopolist should: Produce output where MR = MC. Charge the price on the demand curve that corresponds to that quantity. Never operate on the inelastic portion of the demand curve. Monopolist produces a socially inefficient level of output.

Linear inverse demand function

P(Q) = a+bQ - a is a number greater than zero and b is a number less than zero

Long run adjustments to monopolistically competitive markerts

There will be free entry and the positive economic profits will encourage other firms to enter, this will then reduce your product profits until they are zero. In the long run monopolistically competitive firms produce a level of output such that: 𝑃 >𝑀𝐶, 𝑃=𝐴𝑇𝐶>𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑜𝑓 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡𝑠

Perfectly competitive markets

a market in which (1) there are many buyers and sellers, (2) each firm produces a identical product, (3) buyers and sellers have perfect information, (4) there are no transaction costs, and (5) there is free entry and exit. Firms are price takers. P=MR

economies of scope

exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms

cost complementarity

exists when the marginal cost of producing one output is reduced when the output of another product is increased

Long run competitive equilibrium

in the long run, perfectly competitive firms produce a level of output such that p = MC and p = minimum of AC

marginal revenue

the change in revenue attributable to the last unit of output; for a competitive firm - MR is the market price

deadweight loss of monopoly

the consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost

firm demand curve

the demand curve for an individual firm's product; in a perfectly competitive market, it is simply the market price