Micro: Ch. 7, 8, 9
marginal cost of the third unit of output is
$117 (for 3) - $94 (2) / 3-2 = $23
marginal revenue from the third unit of output is:
$120 Total Revenue / 3 = $40
two main provisions
(1) contracts or combinations in restraint of trade or commerce among the several states or with foreign nations is illegal (2) every person who tries to monopolize or attempt to monopolize any part of trade/commerce is deemed guilty of a felony
Pure Competition Characteristics
(1) demand is perfectly elastic (individual firm's perspective) (2) price is used to maximize/minimize profit/loss by adjusting output
marginal : profits increases
*also means losses decrease* so long as the last unit produced adds more to revenue than to costs
marginal : profit decreases
*also means losses increase* if the last unit produced adds more to costs than to revenue
ATC =
AVC + AFC
*As long as MR is greater than _____ the production of one more unit adds to profits (reduces losses)
MC
advertising is necessary in which models?
MPC and oligopoly to communicate a firm's differentiated products
How do you determine profit/loss based on output?
MR (Sales Price) - AVC - TFC *Remember it is on per unit basis*
pure monopoly revenue and costs
MR < SP produce output to MR = MC losses are possible
at what price would the firm break even?
P4
antitrust
Sherman Act (1890) two main provisions
which is true of price discrimination?
Successful price discrimination will provide the firm with more profit than if it did not discriminate.
x-inefficiency
TC per unit greater than needed --> change price
Total profit
TR - TC
which is most characteristic of a pure monopoly?
The firm produces a good or a service for which there are no close substitutes.
Could a firm remain in business despite losing money?
Yes, because is total fixed cost and average cost per unit and sales price based on a certain output have a total revenue larger than the total cost that would be paid then you would lessen your total loss *As long as price exceeds the average variable costs, the firm should produce in the short run given fixed costs are present*
the long-run supply curve would be downsloping in
a decreasing-cost industry
oligopoly characteristics
a few large firms homogeneous or differentiated products limits control over price entry barriers mergers
Given the same cost data, a pure monopolist producer will charge:
a higher price and produce a smaller output than a purely competitive industry
kinked demand curve
a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases
one feature of a pure monopoly is that the monopolist is
a price maker
price discrimination
a product is sold at more than one price and the price differences are not based on cost differences
rent-seeking
activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes; lobbying
if economic profits exists
additional firms enter the industry, the demand curve shifts down (left) and economic profit decreasing for existing firms
what are the assumptions of a monopolistic competition?
advertising and specific differentiated product demand is highly elastic long run achieves break even short run gains profit efficiency means P > ATC and P > MC
what are assumptions for monopolistic competition?
advertising and specific differentiated products demand highly elastic
the long-run supply curve would be unsloping in
an increasing cost industry
a profit-maximizing firm in the short run will expand output:
as long as marginal revenue is greater than marginal cost
in long-run equilibrium under conditions of pure competition and productive efficiency, all firms produce at minimum
average total cost
price takers
buyers and sellers must accept the price the market determines
negatives of advertising
can be manipulative / confuse consumer consumers pay higher prices barrier to entry for new firms
economic effects of monopolies
charge higher prices but sell lower amounts efficiency is NOT achieved (types productive/allocative)
Mc = MR is the optimal output on a _______
demand curve
four things to cause change in cost monopolies
economies of scale x-inefficiency rent-seeking technology
a monopoly is most likely to emerge and be sustained when
economies of scale are large relative to market demand
If there is allocative efficiency in a purely competitive market for a product, the maximum price producers are willing to pay is:
equal to the minimum price producers are willing to accept
true or false: a monopolist seeks maximum profit per unit
false
true or false: a monopolist will always charge the highest price it can get
false
oligopoly
few firms standardized / differentiated products control prices by collusion many obstacles for entry
which is a barrier to entry
government licensing
DEMAND CURVE for monopolistic competition
highly elastic (not perfect) the monopolistically competitive seller has many competitions producing closely substitutable goods larger # of rivals and weaker product differentiation means the greater price elasticity of each sellers demand
suppose a monopolist calculates that at present output and sales levels, marginal revenue is $1 and marginal cost is $2. he could maximize profits for minimize losses by
increasing price and decreasing output
compared to the purely competitive firm, a pure monopoly
is able to use barriers to entry and maintain positive economic profits in the long run
pure competition
large # of firms standardized products no control; price-takers no obstacles on entry
when compared with the purely competitive industry with identical costs of production, a monopolist will produce
less output and charge a higher price
what are the positives of advertising?
low cost way of providing info to consumers enhances competition speeds up tech. progress can help firms obtain economies of scale
monopolistic competition
many firms differentiated products some control over price relatively easy entry
what type of market is a family's commercial bank industry?
monopolistic competition
consumer losses =
monopolists gains
assumptions of an oligopoly
no collusion / working together kinked demand
how to determine if output: loss minimization
occurs if MR > MC but ATC > MR > AVC
how to determine if output: profit maximization
occurs if MR(Sales Price) > MC (∆TC/ATC) & MR > ATC
what type of market is a hometown supermarket?
oligopoly
what type of market is the car industry?
oligopoly
what type of market is the steel industry?
oligopoly
pure monopoly
one firm product is unique, no close substitutes significant control over price entry is blocked
characteristics of a pure monopoly:
one firm, unique product, significant control over price (price maker), blocked entry
price discrimination is
only illegal if used to lessen or eliminate competition.
productive efficiency for a monopoly
output is less than output=min ATC
an exclusive right granted by government for a number of years to an inventor of a product is a
patent
Q2:
patent/license, ownership/control of resources, unfair competition
if a firm is a price taker, then the demand curve for the firm's product is
perfectly elastic
differentiated products:
physical or quality intangible aspects (service/location, branding/packaging, branding/packaging)
conditions
power to control price and output market segregation no resale ex: airlines, movie theaters, Disney tickets (FL res)
allocative efficiency for a monopoly
price is greater than MC
The data below relate to a pure monopolist and the product it produces. What is the profit-maximizing output and price for this monopolist?
price: $14 quantity: 4
unfair competition
pricing, advertising, anti-competition measures; could be illegal
A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 500 units is $1.50. The minimum possible average variable cost is $1.00. The market price of the product is $1.25. To maximize profit or minimize losses, the firm should:
produce less than 500 units
a firm sells products in a purely competitive market. the marginal cost of the product at the current output of 800 units is $3.50. the maximum profit or minimize losses the firm should
produce more than 800 units
output and profit/loss for MC
produce output where MC = MR short run can produce profits or losses long run will only achieve break even (TR = TC) product development, improvement, and variety
How does monopolistic competition gain an advantage in the market?
product differentiation
efficiency is not achieved - two types and reasoning
productive inefficiency: price > min ATC allocative: price > MC excess capacity
the market model with the largest number of firms is
pure competition
what type of market is a kansas wheat farm?
pure competition
which market model has the fewest number of firms?
pure monopoly
where are some areas the monopolistic competition can improve product?
quality, services, location, or in promotion / packaging
monopolistic competition characteristics
relatively large # of sellers small market share no collusion independent action easy entry and exit differentiated products nonprice competition
characteristics of a monopolistic competition
relatively large number of sellers small market share no collusion independent action easy entry and exit differentiated products non-price competition
which piece of federal legislation aims to prevent monopolization and restraint of trade
sherman act
Economies of scale for monopolies
simultaneous consumption; network effects
collusion
standard set by one company others follow
If firms are losing money in a purely competitive industry, then in the long run this situation will shift the industry:
supply curve to the left, and the market price will increases
If firms enter a purely competitive industry, then in the long run this change will shift the industry:
supply curve to the right and the market price will decrease
a purely competitive firm will be willing to produce at a loss in the short run provided
the loss is no greater than its total fixed costs
one defining characteristic of pure monopoly is that
the monopolist produces a product with no close substitutes
marginal
the revenue and the cost that each additional unit would add to total revenue and to total cost
What do economies of scale, the ownership of essential raw materials, and patents have in common?
they are all barriers to entry
Q1:
though it is true that "all firms compete for the price of consumers" a pure monopoly can exist
Line A represents
total revenue
true or false: price discrimination is not viable if consumers can resell the products they purchase
true
what are the assumptions of pure monopoly demand?
typical barriers to entry no government involvement same sales price (SP) competition for resources
pure monopoly demand
typical market demand structure curve is downward sloping (price impacts qty demanded)
ownership / control of resources
under contract / ownership of resource, yes sometimes
based on the graph above, what is the difference between the purely competitive equilibrium level of output and the pure monopolist equilibrium level of output?
where MC and industry cross vs. MC and MR cross
patents and licenses
yes justifiable bc you put in work to innovate