1 © ©1999 south-western college publishing powerpoint slides prepared by ken long principles of...

1©©1999 South-Western College Publishing

PowerPoint Slides prepared by Ken Long

Principles of Economics2nd edition

by Fred M Gottheil

Principles of Economics2nd edition

by Fred M Gottheil

2

Chapter 11Chapter 11Chapter 11Chapter 11Price & Output in Monopoly, Price & Output in Monopoly,

Monopolistic Competition, Monopolistic Competition, & Perfect Competition& Perfect Competition

04/11/23

©©1999 South-Western College Publishing

3

Price and output in monopoly

Price and output in monopoly

Recall monopoly, single firm, no close

substitutes, barriers to entry

4

In monopoly, firm is a price maker

In monopoly, firm is a price maker

5

What is a Price Maker?What is a Price Maker?A firm that has the ability

to choose among combinations of price and output, attempting to find the profit maximizing combination

6

How does a Monopoly determine Price & Output

to maximize profits?

How does a Monopoly determine Price & Output

to maximize profits?

MR = MC


7

Why are profits maximized MR = MC?

Why are profits maximized MR = MC?

MR > MC (keep producing)MR < MC (stop producing)MR = MC (no $ gained or

lost on the last unit)©©1999 South-Western College Publishing

8

What does the Demand Curve look like for a Monopoly?

What does the Demand Curve look like for a Monopoly?

It is the same as the market demand curve

9

D

Demand curve in Monopoly, same as the Demand curve in Monopoly, same as the market demandmarket demand

P

99Q

10

What is Marginal Revenue?What is Marginal Revenue?

TRQ


MR =

11

Recall that in perfect competition, MR = P, but this is not the case in monopoly. The firm cannot sell any amount at the same price, but must lower price in order to sell more

12

Price Q $50 2$40 3 $30 4$20 5$10 6

What is TR at the 3rd unit?What is TR at the 3rd unit?

$120$120

1212

13

Price Q $50 2$40 3 $30 4$20 5$10 6

What is MR at the 3rd unit?What is MR at the 3rd unit?

$20$20

1313

14

Price Q $50 2$40 3 $30 4$20 5$10 6

What is MR at the 5th unit?What is MR at the 5th unit?

-$20-$20

1414

15

Why is MR < P for all but the first unit of output

for a Monopoly?

Why is MR < P for all but the first unit of output

for a Monopoly?To sell additional units the

firm not only has to lower price on the last unit, but on all previous units


16

Demand

Marginal Revenue

MR < P for all but the first unit of outputMR < P for all but the first unit of output

P

1616Q

17

Profit maximization in monopoly

Profit maximization in monopoly

Put in the marginal cost curve, best output is where MR=MC, best price for that output is found by going up to the demand curve

18

Best price and output for monopoly

Best price and output for monopoly

Q

$

MR

MC

D

1818Q

P

19

Short run profit possibilities

Short run profit possibilities

As always in the short run, can make positive profits, losses, or zero economic profits-to show profit, must add in the average total cost curve.

20

Monopoly: Positive ProfitMonopoly: Positive Profit

Q

$

MR

ATC

MC

D

2020Q

PProfit

P

ATC

21

Monopoly: Loss CaseMonopoly: Loss Case

Q

$

MR

ATC

MC

D

ATC

2121Q

P

P

Loss

22

Monopoly: Zero Profits CaseMonopoly: Zero Profits Case

Q

$

MR

ATCMC

D

ATC

2222Q

P

P

23

When will a firm continue to operate even when making a loss?

When will a firm continue to operate even when making a loss?

When its losses are less than its fixed costs: in other words, as long as Price exceeds AVC, can stay in business in the short run

24

When will a firm shut down when making a loss?

When will a firm shut down when making a loss?

When its losses are greater than its fixed costs


25

How does Monopoly compare to Perfect Competition ?

How does Monopoly compare to Perfect Competition ?

• Higher prices & less output under monopoly

• Long run profits possible in monopoly due to barriers to entry


26

Move from monopoly to monopolistic competitionMove from monopoly to monopolistic competition

Recall the characteristics of monopolistic competition: many firms, producing similar yet differentiated products, relatively free entry

27

What does the graphic model look like for Monopolistic Competition

compared to Monopoly?

What does the graphic model look like for Monopolistic Competition

compared to Monopoly?

It looks very similar because both face a downward sloping demand curve—possibly more elastic in monopolistic competition due to more close substitutes.

28

Why are demand curves downward sloping in

Monopolistic Competition?

Why are demand curves downward sloping in

Monopolistic Competition?Because a firm can

distinguish itself from competitors and therefore has some control over price


29

What happens to the demand curve with more

competition?

What happens to the demand curve with more

competition?The demand curve for an

existing firm will become more elastic and shift to the left as entry occurs


30

More ElasticMore ElasticP

Q

30


D2More More

InelasticInelastic D1

31

What is Normal Profit?What is Normal Profit?The minimum profit a

business owner will accept to continue operating the business

( same as zero economic profit)

32

What is Economic Profit?What is Economic Profit?Money made above and

beyond a normal profit


33

In Monopolistic Competition, can

Economic Profit be made in the short run?

In Monopolistic Competition, can

Economic Profit be made in the short run?Yes! Positive or negative

economic profit can be made in the short run

34

Why is Normal Profit the long run equilibrium in

Monopolistic Competition?

Why is Normal Profit the long run equilibrium in

Monopolistic Competition?Because when positive

economic profit is made, firms will enter the industry eliminating the economic profit

35

In monopolistic competition, what happens

as more firms enter in search of profits?

In monopolistic competition, what happens

as more firms enter in search of profits?

The demand curve of other firms shifts to the left


36

Now move from monopolistic competition to perfect competition

Now move from monopolistic competition to perfect competition

Recall the characteristics of perfect competition: many firms, each a tiny share of the market, producing identical products, free entry and perfect information

37

Why does a Perfectly Competitive firm face a

horizontal demand curve?

Why does a Perfectly Competitive firm face a

horizontal demand curve?Because it can sell all it

brings to market at the market price, therefore P always equals MR


38

Why is a firm that is a part of a Perfectly Competitive

Market a price taker?

Why is a firm that is a part of a Perfectly Competitive

Market a price taker?Because if the firm

charges higher than the market price it will not sell one unit


39

Why is this so?Why is this so?Because consumers

will buy the same thing at a lower price from its competitors


40

The Market and the firm in Perfect Competition

The Market and the firm in Perfect Competition

The Market

PSD

Individual firm

P

P=MR

40

41

Q

MCMR1=P1

MR1=MCMR2=P2

Profits are maximized whereProfits are maximized where MR = MCMR = MC

MR2=MC

P

41Q1Q2

42

Why is a firm’s MC curve above its AVC curve its

Supply Curve?

Why is a firm’s MC curve above its AVC curve its

Supply Curve?Because it always

produces where MR = MC


43

Why don’t we include the MC curve below its AVC curve as a part of

its Supply Curve?

Why don’t we include the MC curve below its AVC curve as a part of

its Supply Curve?Because below the AVC the firm will close down


44

What is the Market’s Supply Curve?

What is the Market’s Supply Curve?

It is the aggregation of the long-run MC curves of the firm’s in the market


45

In Perfect Competition, can Economic Profit be made in the short run?

In Perfect Competition, can Economic Profit be made in the short run?

Yes! Positive or negative economic profit can be

made in the short run

46

Why is a Normal Profit (zero economic profits) made in the

long run?

Why is a Normal Profit (zero economic profits) made in the

long run?Because of the easy

entry - easy exit feature in a Perfectly Competitive Market


47

ATC

MC

Zero Profits in Perfect CompetitionZero Profits in Perfect Competition

47

P

Q1

P = MR

P = ATC

48

What happens when a firm makes more than a

Normal Profit?

What happens when a firm makes more than a

Normal Profit?More firms enter the industry

pushing prices down toward a normal profit


49

S1

S2P1

Right Shift in SupplyRight Shift in Supply

P2

Q2Q1D

4499


50

What happens when a firm makes less than a

Normal Profit?

What happens when a firm makes less than a

Normal Profit?Some firms leave the

industry pushing prices up toward a normal profit


51

S2

S1P2

Left Shift in SupplyLeft Shift in Supply

P1

Q1Q2D

5511


52

The Long Run adjustments in Perfect Competition

The Long Run adjustments in Perfect Competition

The Market Individual firm 52

PSD P

P=MR

MC

ATC

D1

S1

P

P1

Q Q1

53

Explanation of long run adjustmentsExplanation of long run adjustmentsStart at price P, typical firm making zero

profitsSuppose demand increases to D1

Price rises to P1Typical firm making positive profitsWhat happens in the long run?Assuming perfect information and free

entry, new firms enter the marketSupply shifts right until profits eliminatedPrice comes down—but how far depends

on whether costs are affected

54

Long Run, continuedLong Run, continuedConstant cost industry: no change in costs

as new firms enter the market, price returns to P, original price

Increasing cost industry: all firms experience rising costs as new firms enter the market, final price will be higher than original price P

Decreasing cost industry: all firms experience lower costs as new firms enter the market, final price will be lower than original price

55

ATC

MC

Zero Profits in Perfect CompetitionZero Profits in Perfect Competition

55

P

Q1

P = MR

P = ATC

56

Whats so “perfect” about Perfect Competition?

Whats so “perfect” about Perfect Competition?

Note that Q1 output is the output which minimizes ATC, sometimes called the technically efficient output level

Also, at Q1, P = MC , price equals marginal cost, sometimes called the allocative or social efficiency condition

57

According to Joseph Schumpeter why are monopolies more innovative than

perfect competition?

According to Joseph Schumpeter why are monopolies more innovative than

perfect competition?

Because of its deeper financial pockets, can afford more for research and development

58

Are big firms necessarily more innovative?

Are big firms necessarily more innovative?

Not necessarily: some small firms are very innovative-this is still a controversial area in economics.

59

• Why are profits maximized whereMR = MC?

• Why is MR < P for all but the first unit of output for a Monopoly?

• What does the Demand Curve look for a Monopoly?

• When will a firm continue to operate even when making a loss?

60

• What is Normal Profit?• What is Economic Profit?• Why do firms tend to make a Normal

Profit when others enter the market?• Why does a Perfectly Competitive

firm face a horizontal demand curve?• Why is a firm’s MC curve above its

AVC curve its Supply Curve?

61

ENDENDENDEND


1 © ©1999 south-western college publishing powerpoint slides prepared by ken long principles of...

Documents