s -15 - monopoly and other markets

7/27/2019 s -15 - Monopoly and Other Markets

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1/14/2011 Econ. 11 - Lecture #15 1

ANNOUNCEMENT:

SCHEDULE OF EXAMS (Tentative):o TEST #1 DONE!

oTEST #2 Jan. 28,

2011 (Friday).o TEST #3 February, 2011 (TBA).

o FINAL EXAM Announced during

FINAL EXAM WEEK

Lecture 15:

MONOPOLY AND IMPERFECT

COMPETITION

Review: COST & SUPPLY in Competition

Industry cost curves decreasing,

constant, and increasing

Different market structures

Introduction to monopoly and

imperfect competition

3

Price

0 Quantity

P0 P=AR=MR=

Demand

IN PURE COMPETITION, THE FIRM TAKES

THE PRICE DETERMINED IN THE MARKET.

The Average Revenue (AR) does not change

because the Price is the same at any level of

output. The Marginal Revenue is also equal to

the Price.


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1/14/2011 Econ. 11 - Lecture #15 4q0

COST (=AC x Q0)

PROFIT

MC,

AC

0 Quantity

GIVEN MARKET PRICE AT P0

MC

P0 P=MR=

Demand

AC0

AC

THE FIRM PRODUCES q0

1/14/2011 Econ. 11 - Lecture #15 5q0

PROFIT

COST

MC,

AC

0 Quantity


MC

AC0

P0 P=MR=

Demand

AC

q-10If output is q-10, PROFIT

IS SMALLER. MC < MR.

Potential for more profits

1/14/2011 Econ. 11 - Lecture #15 6

PROFIT

COST

MC,

AC

0 Quantity


MC

AC0

P0 P=MR=

Demand

AC

q+10

Additional

Loss

Producing at q+10 means that if Price is at P0,

additional loss is incurred; MC>MR.

q0


3/15

7

P, MC,

AC,

AVC

0 Quantity

MC IS THE SUPPLY SCHEDULE!

AC

AVC

MC

Shut-down point

Break-even pointP1

q1

P3

q3

P4

q4

P2

q2

REVISED RULE:

P=MR=MC

FIRM IN PURE COMPETITION:

THE DEMAND SCHEDULE FOR THEFIRM: ALL OUTPUT CAN BE SOLDAT THEINDUSTRYPRICE

oThis means the Price = Average Revenue =Marginal Revenue.

THE SUPPLY SCHEDULE: MCSCHEDULE (fromshutdown point).

FIRM IN EQUILIBRIUM: Demand isequal to Supply:

oP (or P=AR=MR) = MC.

LONG-RUN COSTAND SUPPLY


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1/14/2011 Econ. 11 - Lecture #15 10A sampl ing graph of th e cost cur ves of al l co mpeti ng f irms in th e market

1/14/2011 Econ. 11 - Lecture #15 11The firms with equal average costs exhaust their optimum production first.

1/14/2011 Econ. 11 - Lecture #15 12

When costs begin to rise and there is additional demand, then the high

cost firms enter the market. Hence, the industry is a rising cost industry.


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1/14/2011 Econ. 11 - Lecture #15 13

INDUSTRY COST CURVES

Long run cost curves indicate whether an

industry becomes competitive ormonopolistic (=one or few firms).

Examples of constant and increasing costindustry leading to competitive outcome.

Case of a very large investment.

Case of the decreasing cost industry leadingto monopoly (=one firm) or oligopoly (=afew firms).

1/14/2011 Econ. 11 - Lecture #15 14

When costs begin to rise and there is additional demand, then the high

cost firms enter the market. Hence, the industry is a rising cost industry.

1/14/2011 Econ. 11 - Lecture #15 15

Cost

Very Large Quantity0

AC

DECREASING

COST

CONSTANT

COST

INCREASING

COST

COST CURVE OF A VERY LARGE SINGLE

INVESTMENT


6/15

16

Cost

Quantity0

Average cost

A decreasing cost long run industry leads to

monopoly (one producer) or oligopoly (a few producers).

ac1

Q1

In the case of a decreasing cost industry, the firm

that is ahead will always have a lower average cost

and therefore will dominate the market.

Q2

ac2

Monopoly and

Imperfect Competition

(one or relatively few

firms in the industry)

18

Industry and the firm: note that the firm is very small

relative to the industry equilibrium.


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1/14/2011 Econ. 11 - Lecture #15 19

Firm

size is

very

small

purecompetit

ion.

Firm size is

somewhat

large but

faces many

competitors with the

same cost

curves.

Firm

sizemeets

all

market

needs.

Size of firm in relation to the industry demand

and market structures

Firm size is

very large

and faces

only very

fewcompetitors.

.

Quantity

Industry demandAverage

cost

0

1/14/2011 Econ. 11 - Lecture #15 20

q0 Q0

Price

QUANTITY

P0

Industry

supplyIndustry

demand

Case of pure or p erfect competition

Firm size is very small relative to the

total industry demand

MC

AC

Firm

supply

1/14/2011 Econ. 11 - Lecture #15 21

Price

QUANTITY

Industry

demand

Case of monopolist ic or imperfect competition

Firm size is large relative to market demand but it has many

competitors. Each firm can influence market outcome through

efforts to distinguish (differentiate) the product from those of

competitors.

MC

AC

0


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1/14/2011 Econ. 11 - Lecture #15 22

Price

QUANTITY

Industry

demand

Case of oligopolistic competition

Firm size is very large relative to market demand but

the market has room for a few competitors. Each firm

can influence market outcome. Firm is sizable in

relation to the industry .

MC

AC

0

23

Price

QUANTITY

Industry

demand

MC

AC

0

Case of monopo ly

Firm size very large in relation to the market. Entry

of competition is effectively blocked by declining cost

curves (natural monopoly) or by regulation.

1/14/2011 Econ. 11 - Lecture #15 24

Firm

size is

very

small

pure

competit

ion.

Firm size is

somewhat

large but

faces many

competitors

with the

same cost

curves.

Firm

size

meets

all

marketneeds.

Size of firm in relation to the industry demand

and market structures

Firm size is

very large

but the

firm faces a

few

competitors.

Quantity

Industry demandAverage

cost

0

PURE

COMPETITI

ON

MON

OPOLISTI

C

COMPETITI

ON

OLIG

OPOLY

MONO

POLY


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See Table 9-2.Summary: Types of

Market Structure

26

Summary: Number of Firms

(Number of Sellers)

Pure Competition Infinitenumber of sellers

Monopolistic or DifferentiatedCompetition Many sellers

Oligopoly Few sellers

Monopoly Only one seller

1/14/2011 Econ. 11 - Lecture #15 27

Summary: Prevalence in the

economy

Pure Competition Very common products in the farm, in auction markets,

in basic commoditiesMonopolistic or Differentiated

Competition Very common: Productsare branded, Service is oftendifferentiated

Oligopoly -- Common

Monopoly -- Common


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1/14/2011 Econ. 11 - Lecture #15 28

Summary: Examples

Pure Competition Basic commodities (staplefoods), public markets, auction markets

Monopolistic or Differentiated Competition Restaurants, Food markets, Department storegoods, Branded consumer items (detergents, soap,toothpaste), Personal Care products (medicines)

Oligopoly Coke vs Pepsi, Big Marketing Groups,Conglomerates, McDo vs Jollibee, Smart vsGlobe vs Sun, Car manufacturers, San Miguel beer

Monopoly The only store in a town; Meralco inMetroManila; ice plant; public utility; etc.

Analysis of monopoly

equilibrium

How a monopoly

maximizes profit

1/14/2011 Econ. 11 - Lecture #15 30

Table 9-1.

MONOPOLY REVENUE & COST

9284127

1146488

7496166

60100205

5096244

4484283

4064322

3536361

290400

MR-MC

(8)

MC

(7)

MR

(6)

Profit

(5)

TC

(4)

TR

(3)

P

(2)

Q

(1)


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1/14/2011 Econ. 11 - Lecture #15 31

Table 9-1.


-89284127

-501146488

227496166

4060100205

465096244

404484283

244064322

13536361

-29290400

Profit

(5)

TC

(4)

TR

(3)

P

(2)

Q

(1)

Profit = TR TC = Total Revenue minus Total Cost

32

Table 9-1.


18-12-89284127

22-20-501146488

164227496166

1044060100205

612465096244

420404484283

528244064322

63613536361

---29290400

MC

(7)

MR

(6)

Profit

(5)

TC

(4)

TR

(3)

P

(2)

Q

(1)

33

Table 9-1.


MRMC63613536361

----29290400

MR-MC

(8)

MC

(7)

MR

(6)

TR-TC

(5)

TC

(4)

TR

(3)

P

(2)

Q

(1)


12/15

34

Table 9-1.


MRMC63613536361

----29290400

MR-MC

(8)

MC

(7)

MR

(6)

TR-TC

(5)

TC

(4)

TR

(3)

P

(2)

Q

(1)

AT SOME POINT MR=MC, or PROFIT IS HIGHEST!

35

TR

40

TR, TC, Total Profit

Quantity

TC

64

84

96

100

96

84

64

36

0

TR

(3)

114

92

74

60

50

44

40

35

29

TC

(4)

8

7

6

5

4

3

2

1

0

Q

(1) Slope of TR

(=MR) is equal

to the slope of

TC (=MC).

Highest Profit Level

36

TC

TR

40


QuantityAnother view: HIGHEST PROFIT LEVEL

50

100 TC

Total Profit-50

-8

22

40

46

40

24

1

-29

Profit

(5)

8

7

6

5

4

3

2

1

0

Q

(1)


13/15

37

TC

TR

40


QuantityTotal cost graphed against total revenue

50

100 TC

Maximum

Profit

Slope of total

profit schedule

is zero at same

quantity where

MR=MC.

1/14/2011 Econ. 11 - Lecture #15 38

To analyze monopoly

equilibrium, it is convenient

to graph the relationships

among:

MR, MC, AC, &

AR (Demand schedule).

39

0

AR, MC, AC

QuantityCost curves of the Firm

MC

114

92

74

60

50

44

40

35

29

TC

(4)

22

18

16

10

6

4

5

6

-

MC

(7)

8

7

6

5

4

3

2

1

0

Q

(1)

ACAC=TC/Q


14/15

40

0

AR, MC, AC

QuantityAverage revenue (=TR/Q) with

MR, MC and AC.

AR(=TR/Q)

AC

MC

-20

-12

4

4

12

20

28

36

-

MR

(6)

64

84

96

100

96

84

64

36

0

TR

(3)

8

7

6

5

4

3

2

1

0

Q

(1)

MR

Monopoly

equilibrium

42

PROFIT

COST

0

MR, MC, AR, AC

QuantityAverage revenue (=TR/Q) with

MR, MC and AC.

AR

AC

MC

-20

-12

4

4

12

20

28

36

-

MR

(6)

22

18

16

10

6

4

5

6

-

MC

(7)

8

7

6

5

4

3

2

1

0

Q

(1)

44.2

MR


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1/14/2011 Econ. 11 - Lecture #15 43

End of todays lecture.

Good day!

Lecture 15

s -15 - monopoly and other markets

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