1 Lesson 3-2 rofit Maximization E: What is a Market Graph? 13-3 (4) Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition, and oligopoly are characterized by the 5 dimensions of market structure. Standard 3c: Students will determine the profit maximizing quantity of output a firm should produce and the price at which the product should be sold given numerical, graphical, or tabular information. Essential uestions: (a) What is a market graph? (b) How do I read a market graph? (c) What does the market graph for erfect Competition look like? (d) What does the market graph for Monopoly look like? (e) What does the market graph for Monopolistic Competition look like? (f) What does the market graph for ligopoly look like? (g) How do I Identify the rofit Maximizing uantity of utput? (h) What quantity should I produce & what price should I charge in order to maximize profit? erfect Competition Monopoly Monopolistic Competition ligopoly E: What is a Market Graph? E: How o I Read a Market Graph? Curve is the amount of added revenue that a business earns if it produces and sells one more unit. Curve is the amount of added cost that a business pays if it produces and sells one more unit. emand Curve emand is the relationship between price and quantity demanded by buyers for the product. Curve is the total cost per unit to produce the product. Curve is the variable cost per unit to produce the product. Each of these five variables (,, rice,, and ) describes the business at a particular level of output (i.e., at a specific uantity). Choose a uantity along the x-axis and then follow that line vertically to see where it intersects each of the curves. At the point of intersection, move left over to the level on the y-axis. That -value is the value of that variable at the chosen uantity. Continue following the chosen uantity vertically to get the values of the other 4 variables. Sometimes, two or more variables will have the same value.
2 E: How o I Read a Market Graph? Identify the values of,, rice,, and at the following levels of output: When = 5: = = rice= = = When = 7: = = rice= = = E: How o I Read a Market Graph? Identify the values of,, rice,, and at the following levels of output: When = 5: = 42 = 19 rice= 57 = 27 = 15 When = 7: = 28 = 28 rice= 50 = 26 = 18 E: What oes the Market Graph for erfect Competition Look Like? E: What oes the Market Graph for erfect Competition Look Like? Let s start with the one graph that is different. o you see a demand curve here? No. But actually, there is a demand curve here it is identical to the curve. First, the market price ( e ) is determined by the overall market Supply and emand. The resulting price is the Market rice for all sellers. S Market Because sellers in perfect competition are price takers, they do not get to increase or decrease the price, so they do not have a downward sloping demand curve. e The demand curve is perfectly elastic (i.e., horizontal, remember?) and equal to, so it is under the curve that you see. Since each seller is a pricetaker, the price is the same no matter the quantity sold. Market Let s see why
3 E: What oes the Market Graph for erfect Competition Look Like? E: What oes the Market Graph for erfect Competition Look Like? A demand curve that has the same rice at every level of output (uantity) is horizontal (perfectly elasticity). emand = rice S Market S Market Marginal Revenue is the increase in TR when you sell one more unit of something. Well, if the price is the same at every level of quantity demanded, then TR will always increase by the amount of the price. So, = rice. S Market = e = emand = rice Even if market forces change the price, all sellers will still be price-takers and the demand curve will still be horizontal. Market = If emand = rice, and = rice, then emand =. Market E: What oes the Market Graph for Monopoly Look Like? E: What oes the Market Graph for Monopoly Look Like? Unlike erfect Competition, Monopoly has a downward sloping demand curve and a separate curve. This has to do with the fact that a Monopoly is a price setter. Higher A monopoly is a price-setter, meaning that it can set the price of its product at any level. f course, if the price is set higher, fewer units will be sold. If the price is set lower, more units will be sold. This negative relationship indicates a downward sloping demand curve. In this case, demand is less elastic, so it is more vertical than the demand curve in erfect Competition. So, what s with the separate curve? Lower Let s look at that Lower Higher
4 E: What oes the Market Graph for Monopoly Look Like? When a firm faces a downward sloping demand curve, unlike perfect competition: rice emand emand Marginal Revenue Instead, since there is a new price for every different output quantity, the curve is steeper and inside the demand curve. E: What oes the Market Graph for Monopoly Look Like? Note that the slope of the curve is steeper than that of the emand curve and that the curve is inside the emand curve. E: What oes the Market Graph for Monopoly Look Like? E: What oes the Market Graph for Monopoly Look Like? For example, let s consider the following demand schedule for a monopoly: If you don t understand how these numbers were calculated, see this figure:
5 E: What oes the Market Graph for Monopoly Look Like? E: What oes the Market Graph for Monopolistic Competition Look Like? As you can see, the curve diverges from the emand curve here, as quantities increase and prices decrease. This is because decreased prices times increased quantities ( x ) result in marginal revenues that are less than price The market graph for Monopolistic Competition looks a lot like the market graph for Monopoly. That is because Monopolistic Competitors are price setters. Also, in the short-run, Monopolistic Competition acts a lot like a Monopoly (i.e., Monopolistic ). In the long-run, Monopolistic Competition acts more like erfect Competition (i.e., Competition ). For now, Monopolistic Competition looks just like Monopoly, except that Monopolistic Competition will have a demand curve that is not quite as steep because there are competitors; and some consumers are sensitive to price increases. E: What oes the Market Graph for ligopoly Look Like? 13-3 (21 The market graph for ligopoly looks a lot like the market graph for Monopoly. This is because firms in oligopoly markets are price setters. Also, oligopolies are often such tight-knit communities that they can behave as huge monopolies that are made up by all the firms. This is the easy graph. Later, we will make ligopoly more complicated by introducing three theories of ligopoly behavior. Each of these three theories has a different graph. For now, let s say it looks like Monopoly. E: How do I Identify the rofit Maximizing uantity of utput? 14-1 (4) The profit-maximizing quantity is the point at which Marginal Revenue = Marginal Cost Remember: Marginal Cost () the change in total cost that results from producing an additional unit Marginal Revenue () the change in total revenue arising from the sale of an additional unit
6 E: How do I Identify the rofit Maximizing uantity of utput? What if >? If is greater than, then the added revenue from selling one more unit will be greater than the added cost of producing that unit that is a profit. roducing more will result in greater profit as long as >, so keep producing! What if <? If is less than, then the added cost of producing one more unit will be greater than the added revenue from selling it that is a loss. roducing more will result in greater losses as long as <, so stop producing! E: How do I Identify the rofit Maximizing uantity of utput? The bottom line is that You should keep producing as long as > You should stop producing before < The point between > and < is: = The profit maximizing quantity! E: What uantity Should I roduce & What rice Should I Charge in order to Maximize rofit? The rule remains the same no matter the structure of the market. To maximize profit, produce the quantity of output () where =. Important questions: What uantity should I produce in order to maximize profit? What rice should I set in order to sell the profitmaximizing uantity? E: What uantity Should I roduce & What rice Should I Charge in order to Maximize rofit? How much should this firm produce in order to maximize profit? What price should be charged?
7 E: What uantity Should I roduce & What rice Should I Charge in order to Maximize rofit? E: What uantity Should I roduce & What rice Should I Charge in order to Maximize rofit? How much should this firm produce in order to maximize profit? What price should be charged? = 4 & = 7 Notice that we did not say whether it is a perfect competitor, a monopoly, a monopolistic competitor, or an oligopoly firm? That s because it doesn t matter (but it s not perf comp). The profit max rule is the same. How much should this firm produce in order to maximize profit? What price should be charged? E: What uantity Should I roduce & What rice Should I Charge in order to Maximize rofit? E: What uantity Should I roduce & What rice Should I Charge in order to Maximize rofit? You can also identify the profit maximizing quantity of output and price by viewing a market graph. Remember, you are looking for the place where =. This will be the place where the curve and the curve intersect. How much should this firm produce in order to maximize profit? What price should be charged? = 9 & = 18 n this graph, the curve intersects the curve where = 7. If you follow = 7 up to the demand curve, you can see the rice = 50.
8 Lesson 3-3 rofit, Loss, & the Shut own ecision Standard 3d: Students will identify whether a firm is experiencing positive economic profit, zero economic profit, or economic loss and assess whether the firm should continue doing business or shut down given numerical, graphical, or tabular information. Essential uestions: (a) How can I identify if a firm is generating profit or loss given a market graph? (b) What conditions show that a firm is profitable? (c) When should a firm generating a loss continue doing business? (d) When should a firm shut down operations? (e) How do the profit, loss, & shut down situations look in erfect Competition? (f) What is Zero Economic rofit? E: How o I Identify if a Firm is Generating rofit or Loss Given a Market Graph? 14-2 (4) Market graphs are useful for identifying whether a firm is profiting or losing money. You have seen that the,, and emand curves are useful for identifying the profit maximizing quantity and price. The last piece of the puzzle is to determine whether you are actually maximizing profit or minimizing loss. This is where the and curves come in. E: How o I Identify if a Firm is Generating rofit or Loss Given a Market Graph? To determine whether a firm is operating at a profit or a loss by viewing a market graph, do the following: 1. Identify quantity where = 2. Identify the price where profitmax intersects emand 3. Identify where profitmax intersects the curve 4. ifference between rice and is the profit/loss E: How o I Identify if a Firm is Generating rofit or Loss Given a Market Graph? 4. The difference between rice and is the profit or the loss (in this case, profit). rofit 3. Identify (cost per unit) where profit maximizing quantity intersects with curve. 1. Identify quantity where = 2. Identify price where profit maximizing quantity intersects with emand curve. profitmax
9 E: How o I Identify if a Firm is Generating rofit or Loss Given a Market Graph? E: What Conditions Show that a Firm is rofitable? 4. The difference between rice and is the profit or the loss (in this case, loss). Loss 3. Identify (cost per unit) where profit maximizing quantity intersects with curve. 1. Identify quantity where = 2. Identify price where profit maximizing quantity intersects with emand curve. is the Variable Cost per unit at any given quantity. is the Total Cost per unit at any given quantity. rice is the Total Revenue per unit. Consider that: rofit = Total Revenue Total Cost rofiter Unit = rice So rice must be > in order to profit. lossmin E: What Conditions Show that a Firm is rofitable? There are three possibilities for a seller in a market (look at the y-axis values): rice > > rice > but rice < rice < < E: What Conditions Show that a Firm is rofitable? There are three possibilities for a seller in a market (look at the y-axis values): rice > > (Figure A) This is the only economically profitable situation for a seller in a market. uantity is determined at the point where = Where uantity intersects with the curve is the of production (Total Cost per unit) rofit is the box below rice and above rice > but rice < rice < <
10 E: What Conditions Show that a Firm is rofitable? E: When Should a Firm Generating a Loss Continue oing Business? There are three possibilities for a seller in a market (look at the y-axis values): rofit rice > > rice > but rice < (Figure B) This situation will end up in a loss. However, the seller should still produce because he will limit his losses. At least variable costs are covered and some portion of fixed cost is recovered. Shutting down would result in a greater loss because no portion of fixed cost would be recouped. rice < < profitmax E: When Should a Firm Generating a Loss Continue oing Business? Loss ortion of Fixed Costs Recovered lossmin E: When Should a Firm Shut own perations? There are three possibilities for a seller in a market (look at the y-axis values): rice > > rice > but rice < rice < < (Figure C) This situation is a shut-down situation. The seller should not produce any output until conditions change. By shutting down, the seller limits losses to fixed costs. Even if the seller produces the loss minimizing quantity at =, the losses would be greater than the fixed cost losses from shutting down.
11 E: When Should a Firm Shut own perations? E: When Should a Firm Shut own perations? Loss ue to Fixed Costs Losses would be limited to this area if the firm SHUTS WN Additional Loss ue to Variable Costs At the = uantity, this is the Variable Cost per unit. As you can see, is greater than price and, subsequently, will make losses greater with each unit produced and sold. It is time to shut down. Additional losses if the firm ES NT SHUT WN lossmin lossmin E: How o the rofit, Loss, & Shut own Situations Look in erfect Competition? Since the demand curve in erfect Competition is the same as the curve and the rice, it looks a little different. However, the dynamics are identical. Here are examples of rofit, Loss, and Shut own in erfect Competition. E: How o the rofit, Loss, & Shut own Situations Look in erfect Competition? rofit = = Loss = = profitmax lossmin
12 E: How o the rofit, Loss, & Shut own Situations Look in erfect Competition? E: How o the rofit, Loss, & Shut own Situations Look in erfect Competition? Loss ue to Fixed Costs Additional Loss ue to Variable Costs = = Losses would be limited to this area if the firm SHUTS WN Additional losses if the firm ES NT SHUT WN = = lossmin lossmin E: What is Zero Economic rofit? 14-2 (21 Lesson 3-4 Market Structures in the Short Run & Long Run = Sometimes, is neither less than nor greater than rice, it is equal to rice. In these cases, there is neither a profit nor a loss. We call this zero economic profit. We will see this when we discuss market structures in the long run and the short run. profitmax Standard 3e: Students will distinguish between the short-term and long-term economic returns received by firms in each of the four basic market structures. Essential uestions: (a) Which dimensions of market structure affect a change in market structure profitability in the long run? (b) How is erfect Competition different in the long run? (c) How is Monopolistic Competition different in the long run? (d) Why is there no change in the long run for Monopoly and ligopoly?
13 E: Which imensions of Market Structure Affect a Change in rofitability in the Long Run? 14-3 (4) Structure imensions Relevant to Long-Run: Barriers to Entry/Exit rofits & Losses rofits in a market draw new competitors because they want a piece of the pie. Losses discourage new competitors, but drive away those with losses because they can t sustain losses in the long run. Entry & Exit If competitors can enter/exit a market easily, they will if there are profits to be earned or losses to avoid. Markets with high barriers to entry and exit usually do not look much different in the long run because firms can t get in or leave. E: Which imensions of Market Structure Affect a Change in rofitability in the Long Run? Structure imensions Relevant to Long-Run: Information Symmetry erfect Information erfect Information when all sellers know everyone s business, they know when there are profits. If everyone knows that other sellers are profiting, they will try to enter the market. Imperfect Information It s harder to know whether firms are earning profit when information is secret, so new competitors may not know that they could earn profit. Imperfect Information erfect Competition Monopolistic Competition ligopoly Monopoly E: How is erfect Competition ifferent in the Long Run? E: How is erfect Competition ifferent in the Long Run? erfect Competition in the Short Run erfect Competition in the Short Run This is a perfect competitor earning profit in the short run. This is a perfect competitor realizing a loss in the short run. rofit = = Loss = = profitmax lossmin
14 E: How is erfect Competition ifferent in the Long Run? In the long run: Economic profit and economic losses are eliminated. Because of (a) no barriers to entry or exit and (b) perfect information: The existence of economic profits will draw new entrants into the market. As new firms enter, increased supply will drive the price down until all economic profits are deteriorated. The existence of economic losses will spur some to exit the market. As firms exit, decreased supply will drive the price up until all economic losses are gone. E: How is erfect Competition ifferent in the Long Run? erfect Competition in the Long Run profitmax rofit ( > ) 0 rofit (=) Loss ( < ) E: How is erfect Competition ifferent in the Long Run? erfect Competition in the Long Run E: How is Monopolistic Competition ifferent in the Long Run? Monopolistic Competition in the Short Run This is a Monopolistic competitor earning profit in the short run. In the long-run, = =. The result is no economic profit and no economic loss (but there is accounting profit). rofit = = = profitmax profitmax
15 E: How is Monopolistic Competition ifferent in the Long Run? Loss Monopolistic Competition in the Short Run This is a Monopolistic competitor realizing a loss in the short run. lossmin E: How is Monopolistic Competition ifferent in the Long Run? Just like perfect competition, in the long run: Economic profit and economic losses are eliminated because of low barriers to entry or exit. When there are profits, competitors enter the market (with close substitutes), drawing buyers away from sellers and shifting demand curves to the left, decreasing prices to match. When there are losses, competitors exit the market, moving buyers to existing sellers and shifting their demand curves to the right, increasing the price to match. E: How is Monopolistic Competition ifferent in the Long Run? Monopolistic Competition in the Long Run E: How is Monopolistic Competition ifferent in the Long Run? Monopolistic Competition in the Long Run > In the long-run, rice =. The result is no economic profit and no economic loss (but there is accounting profit). = = < profitmax profitmax
16 E: Why is There No Change in the Long Run for Monopoly & ligopoly? In the long run Monopoly looks the same as it does the short run. That is, there is no difference between the short run and the long run for Monopoly. Why? Monopoly has extremely high barriers to entry/exit: New competitors cannot enter the market, increase supply, and drive down the price to erode profits. Monopolies cannot exit the market when experiencing losses. Monopolies are very secretive: Even if there was a way to enter the market, only the monopoly would know about it, and they would likely keep it secret. E: Why is There No Change in the Long Run for Monopoly & ligopoly? 14-3 (17 In the long run, ligopoly looks very similar to what it looks like in the short run. Why? Like Monopolies, ligopolies have high barriers to entry/exit: New competitors have difficulty entering the market and eroding profits. ligopolies can, however, exit the market when experiencing losses, though they will probably merge with a competitor. Like Monopolies, ligopolies are also very secretive: The group of firms in the market guard their market as a group to keep new firms from learning the secrets to success. Lesson 3-5 Theories of ligopoly Behavior Standard 3f: Students will distinguish among three theories of oligopoly behavior and their characteristics. Essential uestions: (a) What is the Mindset of oligopoly firms? (b) What are the three theories of oligopoly behavior? (c) What is Kinked emand Curve Theory? (d) Why is there a gap in the curve in Kinked C Theory? (e) What is Unkinked emand Curve Theory? (f) What is Cartel Theory? ligopoly 15-1 (4) ligopoly is a market structure with the following characteristics: Many Buyers and Few Sellers Some market power (price-setter) High or many barriers to entry or exit roduct can be either homogeneous or heterogeneous Imperfect Information
17 E: What is the Mindset of ligopoly Firms? Because there are few competitors in an oligopoly market, each firm is very familiar with the other firms in the industry and exhibit certain degrees of rivalry. They watch one another very closely and often mimic one another s behaviors, especially in terms of product features/pricing/promotion. Though they mimic one another, they also know that it is important to be seen as different, so they rely strongly on brand loyalty and identifying themselves as different from competitors. E: What are the 3 Theories of ligopoly Behavior? Economists have identified 3 theories that explain how oligopoly firms make decisions: Kinked emand Curve Theory Unkinked emand Curve Theory Cartel Theory E: What is Kinked emand Curve Theory? Kinked emand Curve Theory Because oligopoly firms mimic one another, if one firm lowers its price, the others will match those price cuts. However, kinked demand curve theory assumes that price increases will NT be copied. If one player increases its price, buyers will move to a different player and market share will increase for that player simply because it did not increase its price. E: What is Kinked emand Curve Theory? Kinked emand Curve Theory The result is a kinked demand curve with the kink at the current market price: Below the kink, decreases in price result in normal increases in quantity demanded. Above the kink, increases in price result in substantial decreases in quantity demanded.
18 E: What is Kinked emand Curve Theory? E: Why is There a Gap in the Curve in Kinked emand Curve Theory? Kinked emand Curve Theory The kink in the demand curve also affects the marginal revenue curve: Below the kink, the curve is steeper. Above the kink, the curve is more horizontal. The kink in the demand curve also creates a vertical gap in the curve at the quantity demanded at the point of the kink in the demand curve Vertical gap in at emand curve & curve for lower portion of kinked demand curve. emand curve & curve for upper portion of kinked demand curve. Additionally, you can also see that instead of the curve kinking at the level of output, there is actually a huge vertical gap in the curve. verlap both demand curves and you can see that the kink in the demand curve takes place at the price. E: Why is There a Gap in the Curve in Kinked emand Curve Theory? E: What is Kinked emand Curve Theory? Usually, the curve will past through the gap in the curve, indicating the proper level of production and the price. Kinked emand Curve Theory This theory makes oligopoly appear very similar to perfect competition since there is little freedom to set a higher price. After all, notice that above the kink, the demand curve goes almost horizontal and the marginal revenue curve is very close to the demand curve.
19 E: What is Unkinked emand Curve Theory? Un-Kinked emand Curve Theory Like kinked demand curve theory, this theory assumes that price cuts will be copied by competitors. However, unlike kinked demand curve theory, this theory assumes that price increases will also be copied by competitors in oligopoly. This theory makes oligopoly appear very similar to monopolistic competition, but with higher barriers to entry and fewer sellers. E: What is Unkinked emand Curve Theory? Un-Kinked emand Curve Theory Like Monopolistic Competition, the demand curve in Unkinked emand Curve Theory is very elastic. It has a downward slope, but it is not very steep. E: What is Cartel Theory? Cartel Theory A cartel is an organization of firms within an industry that cooperates in making production and pricing decisions together. Cartels act as a single organization in making production and pricing decisions, much like a monopoly. This usually means that output is lower, price is higher, and profits will be higher for the whole industry. E: What is Cartel Theory? Cartel Theory roblems with Cartels: Non-Cartel Competition Since cartel members earn monopoly-level profits, the industry will attract new entrants that can overcome barriers to entry and not be subject to the cartels agreements Cheating Cartel Members: Even though cartels behave as monopolies, they are still different firms with separate goals and desires for profits. Restricting production results in a higher price. Since the price is higher, cartel members are tempted to cheat by increasing production to earn higher profits.
20 E: What is Cartel Theory? Lesson 3-6 Cartel Theory 15-1 (17) Like Monopoly, the demand curve in Cartel Theory is very inelastic. It has a downward slope and is very steep. Basically, the cartel behaves as a single organization making decisions as one supplier. That is, the cartel acts like a monopoly. Economic Efficiency & Government rice Controls Standard 3g: Students will assess the economic efficiency of each of the four basic market structures and identify solutions for dealing with market inefficiency. Standard 3h: Students will assess the effects of government price controls on economic efficiency and on other market dynamics. Essential uestions: (a) What is economic efficiency? (b) What are consumer s surplus & producer s surplus? (c) What is a deadweight loss? (d) How economically efficient are each of the 4 basic market structures? (e) How oes Government Intervention in Markets Affect Economic Efficiency? E: What is Economic Efficiency? 15-2 (4) Economic efficiency is a concept concerned with getting the most benefit as possible from every resource in society (every tree, every person, every tool, etc.). It does not care who gets the benefit and how much they each get, but refers to the sum of all benefits received by all sellers and consumers. Sometimes, consumers can get more benefit (called consumer s surplus ) by taking away benefit for sellers. Sometimes, sellers can get more benefit (called producer s surplus ) by taking away benefit from consumers. When sellers or consumers take extra benefit from one another, it usually results in some wasted benefit. This wasted benefit is called deadweight loss. E: What are Consumer s Surplus & roducer s Surplus? Consumer s Surplus is: - the difference between the price actually paid and the price that a buyer is willing to pay. - the area directly underneath the demand curve but above the price. roducer s Surplus is: - the difference between the price actually received and the price that a seller is willing to accept. - the area directly above the supply curve but below the price. e 0 Consumer s Surplus roducer s Surplus rice the buyer is willing to pay. rice actually received. rice the seller is willing to accept. rice actually paid. e S Consumer s Surplus + roducer s Surplus = Total Benefit to Society Maximizing the Total Benefit to Society = Economic Efficiency
21 E: What are Consumer s Surplus & roducer s Surplus? E: What are Consumer s Surplus & roducer s Surplus? 1. The first person willing and able to buy is willing and able to pay a very high price; but since one price is set for all buyers, the first buyer is getting a lot of additional benefit. 2. ne of the last buyers to come into the market is willing and able to pay a lower price that is much closer to the actual price; so this buyer is not getting as much additional benefit as the first person willing and able to buy. e 0 Willing & Able to pay a Higher rice Consumer s Surplus Willing & Able to pay a Lower rice e The actual price that everyone pays. 3. Consumer s Surplus is equal to the sum of all of the additional benefit that every buyer gets from paying less than they are willing and able to pay. 4. In an efficient market, it is equal to the area of the triangle created by the Y-axis, the equilibrium price line, and the demand curve. S 1. The first unit the seller sells, he is willing to sell for a lower price; but since one price is set for all units sold, the seller is getting a lot of additional benefit for the first unit sold. 2. The seller is willing to sell one of the last units sold for a price that is much closer to the actual price; so the seller is not getting as much additional benefit for later units sold compared to earlier units sold. e 0 3. roducer s Surplus is equal to the sum of all of the additional benefit that the seller receives for every unit sold from receiving more than he is willing to receive. 4. In an efficient market, it is equal to the area of the triangle created by the Y-axis, the equilibrium price line, and the supply curve. roducer s Surplus Willing to accept a Lower rice Willing to accept a rice that is higher than prior units sold. e The actual price that the seller receives. S E: What is a eadweight Loss? (Economic Efficiency) S E: What is a eadweight Loss? (Economic Efficiency) S Monopoly rice Consumer s Surplus e roducer s Surplus eadweight Loss e rice Limit Consumer s Surplus roducer s Surplus eadweight Loss 0 rofitmax e 0 LossMin e
22 E: What is a eadweight Loss? In both cases of economic inefficiency, the problem is that marginal benefit to society is not equal to marginal cost to society. The marginal benefit that society gets from an economic exchange is the utility received by the buyer, indicated by the price paid. The marginal cost that society pays to create the benefit is the marginal cost of the resources used, which is indicated by the marginal cost of production. So, economic efficiency is maximized where the marginal benefit to consumers (price) is equal to the marginal cost (the firm s marginal cost). E: How Economically Efficient are each of the 4 Basic Market Structures? erfect Competition erfect competition is the only economically efficient market structure, because it is the only market where rice is equal to Marginal Cost. Monopoly Monopolistic Competition ligopoly E: How Economically Efficient are each of the 4 Basic Market Structures? erfect Competition Monopoly Monopoly is an economically inefficient market structure because it produces a quantity and sets a price where rice > Marginal Cost. This transfers some consumer s surplus from buyers and provides the monopoly with more producer s surplus, introducing a deadweight loss. Monopolistic Competition ligopoly eadweight Loss E: How Economically Efficient are each of the 4 Basic Market Structures? erfect Competition Monopoly Monopolistic Competition Monopolistic competition also introduces a deadweight loss by setting rice >. The inefficiency is not as severe as that introduced by monopoly, but it is economically inefficient nonetheless. ligopoly eadweight Loss
23 E: How Economically Efficient are each of the 4 Basic Market Structures? erfect Competition Monopoly Monopolistic Competition ligopoly ligopoly also introduces a deadweight loss by setting rice >. The inefficiency is not as severe as that introduced by monopoly, but it is economically inefficient nonetheless. eadweight Loss E: How oes Government Intervention in Markets Affect Economic Efficiency? 15-2 (15) Because market structures that are not perfectly competitive wind up being less economically efficient, governments often take measures to impose efficiency on those markets. Monopolies, ligopolies, and Monopolistic Competitors tend to set their prices higher than Marginal Cost, so by forcing these companies to set lower prices, governments can make these markets more economically efficient. This is called a price ceiling (a maximum price allowable within a market). E: How oes Government Intervention in Markets Affect Economic Efficiency? 15-3 (4) We ve seen how firms decide on the price they will charge to maximize profit, but Sometimes, the government imposes price controls: rice Ceiling a maximum legal price Intended to benefit consumers/buyers Create shortages: suppliers make less than people want Result in illegal sales at prices above the ceiling (people bid up the price on the side because there is a shortage) Encourages non-price rationing (long lines, lottery, favoritism, etc.) E: How oes Government Intervention in Markets Affect Economic Efficiency? Sometimes, the government imposes price controls: rice Floor a minimum legal price Intended to protect producers/sellers Create surpluses: suppliers make more than people want Government purchasing surpluses to maintain price floor rice controls shave down the consumer and producer surplus triangles the result is economic inefficiency.
24 E: How oes Government Intervention in Markets Affect Economic Efficiency? E: How oes Government Intervention in Markets Affect Economic Efficiency? rice Floor e rice Ceiling Consumer s Surplus Consumer s Surplus with rice Ceiling roducer s Surplus with rice Floor roducer s Surplus Loss in efficiency due to price controls Surplus Shortage S Though a price ceiling can introduce an economic inefficiency and a shortage in a market, it can also increase economic efficiency if used appropriately. rice eadweight Loss rice Ceiling The eadweight Loss has been reduced significantly. 0 e E: How oes Government Intervention in Markets Affect Economic Efficiency? rice floors, unfortunately, cannot increase economic efficiency because sellers tend to want higher prices anyway. rice floors mainly just benefit inefficient suppliers and help keep them in business. rice floors can actually make efficient markets less efficient by robbing buyers of consumer s surplus. E: How oes Government Intervention in Markets Affect Economic Efficiency? Because more competitive markets tend to be more economically efficient, the U.S. government likes competition and has created laws to encourage competition: Anti-Trust Laws: Legislation prohibiting monopolies. Legislation prohibiting businesses from gaining and holding monopoly-like power. Anti-Trust laws tend to increase economic efficiency by making markets more competitive.
25 E: How oes Government Intervention in Markets Affect Economic Efficiency? 15-3 (10) erfect Competition is the most economically efficient market structure. There is nothing the government can do to make a perfectly competitive market more efficient. rice ceilings will make perfect competition less efficient. rice floors will make perfect competition less efficient. Unfortunately, perfect competition doesn t really exist in its purest form.
Lesson 3-2 Profit Maximization Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition, and oligopoly are characterized
roblem et #3 Answers Economics 26H, John L. Turner 1. (a) upply (b) Equilibrium: *=5, *= emand 5 upply Curve given the tax (slope still Original upply Curve (d) New equilibrium: *=4, *=80 80 60 4 5 emand
Chapter 1- Introduction A SIMPLE ECONOMY Central PROBLEMS OF AN ECONOMY: scarcity of resources problem of choice Every society has to decide on how to use its scarce resources. Production, exchange and
www.liontutors.com ECON 102 Brown Final Exam (New Material) Practice Exam Solutions 1. B A very large percent of their earnings comes from economic rent 2. B Any funds left, after everyone who has a claim
CH 15-16 short answer study questions Answer Section ESSAY 1. ANS: There are a large number firms; each produces a slightly different product; firms compete on price, quality and marketing; and firms are
Disclaimer: The review may help you prepare for the exam. The review is not comprehensive and the selected topics may not be representative of the exam. In fact, we do not know what will be on the exam.
The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph
www.liontutors.com ECON 102 Wooten Final Exam Practice Exam Solutions 1. A monopolist will increase price and decrease quantity to maximize profits when compared to perfect competition because a monopolist
ECON 101 KONG Midterm 2 CMP Review Session Presented by Benji Huang Chapter 5 Efficiency and Equity Benefit, Cost, Surplus Consumers (1) A consumer benefits from the consumption of a product this benefit
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CH 12 Taylor: Principles of Economics 3e 1 Monopolistic Competition and Differentiated Products Monopolistic competition refers to a market where many firms sell differentiated products. Differentiated
Perfect Competition In this section of work and the next one we derive the equilibrium positions of firms in order to determine whether or not it is profitable for a firm to produce and, if so, what quantities
www.liontutors.com ECON 102 Brown Final Exam Practice Exam Solutions 1. B 2. C 3. C All products are identical (homogenous) in perfect competition so there is no such thing as brand preference. 4. C Breakeven
!! www.clutchprep.com CONCEPT: THE FOUR MARKET MODELS Market structure describes the environment in which a firm operates, determined by the Perfect Competition Monopolistic Competition Oligopoly Monopoly
Econ 2113: Principles of Microeconomics Spring 2009 ECU Chapter 12 Monopoly Market Power Market power is the ability to influence the market, and in particular the market price, by influencing the total
Business Economics Monopoly Managerial Decisions for Firms with Market ower Monopoly Thomas & Maurice, Chapter 12 Herbert Stocker firstname.lastname@example.org Institute of International Studies University
These notes essentially correspond to chapter 11 of the text. 1 Monopoly A monopolist is de ned as a single seller of a well-de ned product for which there are no close substitutes. In reality, there are
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Market Structures The classification of market structures can be arranged along a continuum, ranging from perfect competition, the most competitive market, to monopoly, the lease competitive: Perfect competition
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FINALTERM EXAMINATION FALL 2006 QUESTION NO: 1 (MARKS: 1) - PLEASE CHOOSE ONE Compared to the equilibrium price and quantity sold in a competitive market, a monopolist Will charge a price and sell a quantity.
Unit 6 Perfect Competition and Monopoly - Practice Problems Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One characteristic of a perfectly competitive
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ECON 200. Introduction to Microeconomics Homework 5 Part II Name: [Multiple Choice] 1. A firm is a natural monopoly if it exhibits the following as its output increases: (d) a. decreasing marginal revenue
Amherst College epartment of Economics Economics 54 Fall 2005 Thursday, October 13: Short and Long Run Equilibria Equilibrium in the Short Run The equilibrium price and quantity are determined by the market
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Name: Date: 1. Which of the following will not be true of a perfectly competitive market? A) Buyers and sellers will have an imperceptible effect on the market. B) Firms can freely enter and exit the market.
Chapter 6 Competition Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-1 Chapter 6 The goal of this
9.8. C H A T E R 5 In this chapter, look for the answers to these questions: E Monopoly RINCILES OF Economics I N. Gregory Mankiw remium oweroint Slides by Ron Cronovich 9 South-Western, a part of Cengage
ECONOMICS 103 Topic 8: Imperfect Competition Single price monopoly. Monopolistic competition. 1 COMPETITIVE MARKETS V MONOPOLY Thus far, all firms have been price takers. - Markets are characterized by
Lecture 12 Monopoly By the end of this lecture, you should understand: why some markets have only one seller how a monopoly determines the quantity to produce and the price to charge how the monopoly s
Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture -29 Monopoly (Contd ) In today s session, we will continue our discussion on monopoly.
!! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLISTIC COMPETITION A market is in monopolistic competition when: Nature of Good: The goods for sale are, but not identical - Products are said to
I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.
Perfect competition the competitive firm s supply decision Microeconomics Industries and the number of firms An industry is the set of all firms making the same product. The output of an industry is the
CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions
Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose
In this session we will look at monopolies, where there is only one firm in the market with no close substitutes. For example, Microsoft first designed the operating system Windows. As a result of this
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Market structures Why Monopolies Arise Market power Alters the relationship between a firm s costs and the selling price Charges a price that exceeds marginal cost A high price reduces the quantity purchased
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Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic
Chapter 14 Perfectly competitive Market But first lets look at this Profit Maximization Profit Maximization This occurs where marginal revenue (MR) = marginal cost (MC). MR = MC Marginal revenue is the
Unit 2.1 Unit Overview Markets Definition of markets with relevant local, national and international examples Brief descriptions of perfect competition, monopoly and oligopoly as different types of market
Monopolistic Competition Characteristics: Many sellers Product differentiation Free entry and exit In the long run, profits are driven to zero Firms have some control over price What does the costs graph
Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly
Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique
1 Why Monopolies Arise Basic Economics Chapter 15 Monopoly Monopoly - The monopolist is a firm that is the sole seller of a product (or service) without close substitutes - The monopolist is a price maker
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Microeconomics Exam Notes Opportunity Cost What you give up to get it Production Possibility Frontier Maximum attainable combination of two products (Concept of Opportunity Cost). Main Decision Makers:
Micro 101, Chapter 10 1 Chapter 10: Monopoly Main objectives: 1. Define what constitutes a monopoly - pure monopoly: only one seller of a good/service with no close substitutes 2. Describe types of barriers
ECON 21 (Summer 216 Sections 1 & 11) Exam #3C Multiple Choice Questions: (3 points each) 1. I am taking of the exam. C. Version C 2. is a market structure in which there is one single seller of a unique
ECON 21 (Summer 216 Sections 1 & 11) Exam #3D Multiple Choice Questions: (3 points each) 1. I am taking of the exam. D. Version D 2. is a market structure in which there is one single seller of a unique
Microeconomics Modified by: Yun Wang Florida International University Spring, 2018 1 Chapter 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Outline 13.1 Demand and
15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly
Market structures Perfect competition Market Structures Market structure refers to the number and size of buyers and sellers in the market for a good or service. A market can be defined as a group of firms
MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS Townley, Chapter 4 Review of Basic Microeconomics Slides cover the following topics from textbook: Input markets. Decision making on the margin. Pricing
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Ecn 100 - Intermediate Microeconomic Theory University of California - Davis March 19, 2009 Instructor: John Parman Final Exam You have until 5:30pm to complete the exam, be certain to use your time wisely.
Lecture 2 Perfectly competitive markets Kosmas Marinakis, Ph.. Important notes 1. Homework 1 will is due on Monday 2. Practice problem set 2 is online microeconomics II first module 2013-18 Kosmas Marinakis,
Question # 1 of 15 ( Start time: 01:24:42 PM ) Total Marks: 1 A person with a diminishing marginal utility of income: Will be risk averse. Will be risk neutral. Will be risk loving. Cannot decide without
Eastern Mediterranean University Faculty of Business and Economics Department of Economics 2016-17 Fall Semester Duration: 110 minutes ECON101 - Introduction to Economics I Final Exam Type A 11 January
CHAPTER 8: SECTION 1 A Perfectly Competitive Market Four Types of Markets A market structure is the setting in which a seller finds itself. Market structures are defined by their characteristics. Those
16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter
1. Suppose that - at a given level of an economic activity - marginal social cost is greater than marginal social benefit. Which of the following statements is TRUE? I. Social surplus would be higher at
2004 SLC Economics Page 1 Indicate whether the sentence or statement is True or False. Mark "A" if the statement is True or "B" if it is False. 1. The marginal social cost equals the marginal private cost
Unit 6 I. Choose the correct answer (each question carries 1 mark) 1. A market structure which produces heterogenous products is called: a) Monopoly b) Monopolistic competition c) Perfect competition d)
Foundation Course in Managerial Economics- Solution Set- 1 Final Examination Marks- 100 Section I (20 questions; 1 mark each) 1. Which of the following statements is not true? a. Societies face an important
INTRODUCTION This chapter addresses the following key questions: What are profits? What are the unique characteristics of competitive firms? How much output will a competitive firm produce? Chapter 7 THE
Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique
CONTENTS Introduction to the Series iv 1 Introduction to Economics 5 2 Competitive Markets, Demand and Supply 17 3 Elasticities 37 4 Government Intervention in Markets 44 5 Market Failure 53 6 Costs of
While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The
ECONOMICS CHAPTER 9: FORMS OF MARKET Class: XII(ISC) 2017-2018 Q1) Difference between Oligopoly and Monopolistic competition. Basis Oligopoly Monopolistic competition 1. Meaning It is that form of market
Chapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Pricing Under Homogeneous Oligopoly We will assume that the
Perfect Competition What conditions must exist for perfect competition? What are barriers to entry and how do they affect the marketplace? What are prices and output like in a perfectly competitive market?
1 Basic Economics Chapter 14 Firms in Competitive Markets Competitive markets (1) Market with many buyers and sellers (e.g., ) (2) Trading identical products (e.g., ) (3) Each buyer and seller is a price
I. Learning Objectives In this chapter students should learn: II. Markets III. Demand A. What demand is and how it can change. B. What supply is and how it can change. C. How supply and demand interact