Economics M8

Perfect Competition

Buyers and sellers operate independently of each other and individual actions do not influence the market. Firms are both price-takers in both input and output markets. In equilibrium, each firm is identical in all respects - size, production techniques, prices charged, resources used, etc. All firms earn ZERO economic profits

Sources of Monopoly Power

Economies of scale Economies of scope Cost Complementary Patents and other legal barriers

Economies of scale - exist whenever long-run average costs decline as output increases. Economies of scope - exists 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 in a multiproduct cost function when the marginal cost of producing one output is reduced when the output of another product is increased; that is, when an increase in the output of product 2 decreases the marginal cost of producing output Patents and other legal barriers - Government may grant an individual or a firm a monopoly right. Ex. City may prevent another utility company from competing against the local utility company.

Economies of scale - exist whenever long-run average costs decline as output increases. Economies of scope - exists 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 in a multiproduct cost function when the marginal cost of producing one output is reduced when the output of another product is increased; that is, when an increase in the output of product 2 decreases the marginal cost of producing output Patents and other legal barriers - Government may grant an individual or a firm a monopoly right. Ex. City may prevent another utility company from competing against the local utility company.

Economies of scale

Exist whenever long-run average costs decline as output increases.

Cost complementarity

Exists in a multiproduct cost function when the marginal cost of producing one output is reduced when the output of another product is increased; that is, when an increase in the output of product 2 decreases the marginal cost of producing output.

Economies of scope

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

Patents and other legal barriers

Government may grant an individual or a firm a monopoly right. Ex. City may prevent another utility company from competing against the local utility company.

Monopoly

Market structure in which a single firm serves an entire market for a good that has no close substitutes.

Shutdown if:

P < AVC (Firm must still pay FC)