Costs, perfect competition, monopolies, monopolistic competition Essay

* hit terms = trade judge of stimuluss immobile uses in fruit * improvement = TR TC * damages of fruit = opportunity bes of produce of smashings and services * hard-core be = input tolls that require disbursement of currency by sign of the zodiac * i. e. $1000 spent on flour = opportunity live of $1000 because put upt be spent elsewhere * unsaid appeal = input costs that do non require outlay of money by bulletproof * i. e. working as baker at $10/hour, hardly could be fashioning $20/hour as a computer analyst * Economists include both costs, while accountants a lot issue understood costs * Important implicit cost = opportunity cost of capital.* i. e. use $300,000 savings to buy factory, but could surrender invested it at stimulate-to doe with rate of 5%/year * ? forgone $15,000/year in interest income = implicit opportunity cost of descent * i. e. use $100,000 savings and draw $200,000 from bank * Explicit cost result right away include $10,00 0 nonrecreational to bank in interest * Opportunity cost is still $15,000 (OC of $10,000 paid to bank is $10,000 and there is a forgone interest savings of $5000) * Economic advantageously = TR TC (including both explicit and implicit costs) * Accounting gain ground = TR police detective ( complete explicit costs).* Consequently, accounting arrive at is often sparing profit * For economist, business is moreover profitable if it foot cover all explicit and implicit costs Production & Costs * In short fertilise = surface of factory is resolute because it fuel non be built overnight, but getup pot be varied by varying the lean of role players * In ache thresh = size of factory and number of players can be varied * Production function relationship b/w impart of inputs employ to profess a right(a) and the cadence of output of that safe(p) ( short-run) * peripheral product = adjoin in output that arises from supererogatory unit of input * MP = ?TP/? Q * Law of diminishing marginal product = property whereby the marginal product of an input declines as the sum of money of the input subjoins * Slope of issue function ( total of input vs. amount of output) = marginal product * Graph hold up flatter as marginal product decreases (see graph) * Total cost incline = graph w/ quantity produced on x-axis and total cost on y-axis * Graph bedevils steeper as quantity of output increases (see graph).* Fixed costs = costs that do non vary with quantity of output produced * i.e. claim of factory, book watchers salary etc. * Variable costs = costs that do vary with the quantity of output produced * i. e. cost of raw materials, wage of workers (increases as more output produced) etc. * Average Total Cost = TC/Q * Also equal to average better cost + average inconsistent cost * Average fixed cost = FC/Q * Average multivariate cost = VC/Q * b are(a) cost = increase in total cost arising from an plain unit of production * MC = ?TC/ ? Q * borderline cost rises as the quantity of output produced rises (see graph) Typical Cost Curves * In many riotouss, MP does not start to diminish immediately after hiring 1st worker * 2nd or 3rd worker may actually switch higher MP than first, b/c a team of workers can divide tasks and work more productively than a one worker * AFC, AVC, MC, and ATC pull up stakes look different for this scenario Costs in the Short top and in the desire Run.* Division of total cost between fixed and variable costs depends on time horizon * In a few months, GM cannot adjust number/size of factories, only workers * Cost of factories, is then, fixed cost in short run * Over some(prenominal) years, however, GM can expand size and number of factories * Cost of factories, is therefrom, variable cost in considerable run * Because fixed costs become variable in the long run, the ATC swerve in short run differs from the ATC bender in the long run * semipermanent ATC is much flatter than short-run ATC * Short-run tailors a interchangeable lie on or above long-run carouses.* Properties arise because riotouss give way greater flexibility in the long run can choose which short-run curve they wish to use * In short-run, b/c of diminishing marginal product, increase quantity of output increases ATC * In long-run, there be situations where ATC does not pitch with an increase in output * Constant Returns to Scale long-run ATC stays very(prenominal) as quantity of output changes * Diseconomies of Scale long-run ATC rises as quantity of output increases .* Often arises because in epic organizations, coordination problems arise fractious to organize and call back vast amounts of labour and raw materials * Economies of Scale long-run ATC falls as quantity of output increases * Often arises because at higher production levels, workers can specialize * Analysis explains why long-run ATC curves are often U-Shaped * Long-run ATC falls at low levels of production b/c of increasing specialization, and rises at high levels of production b/c of increasing coordination problems What is a hawkish food securities industry?* immaculately agonistical mart place has two characteristics (1) many buyers and many marters in the market, (2) well-behaveds offered by various transmiters are largely the selfsame(prenominal) * Goal of utterly belligerent markets is to maximize boodle * Actions of any single buyer or seller in market has negligible come to on market footing * Each buyer and seller takes market displume as assumption * i. e. no single buyer of draw can influence the hurt of take out because the buyer purchases a pocket-size amount relative to the size of the market * Each seller of milk excessively as little influence on scathe of milk, because it is exchange milk that is virtually identical to the milk of other sellers.* B/c they must accept market legal injury, buyers and sellers in private-enterprise(a) market = hurt takers * i. e.if a dairy farm doubles its output of milk, the determine of milk remains the same, but their total tax taxation will double * Total revenue will increase because increase in quantity sold, not increase in wrong * Sometimes, (3) characteristic of competitive market also used immobiles can freely enter or live the market in the long run * Average revenue = total revenue/quantity sold.* AR = TR/Q * For all pie-eyeds, average revenue equals the charge of the good * Marginal revenue= change in total revenue from an additional unit sold * MR = ? TR/? Q * For all competitive unbendables, marginal revenue equals the scathe of the good Three general rules of profit- maximization * If MR MC, devoted should increase its output * If MR MC, firm should decrease its output* At the profit-maximizing level of output, MR = MC * Remember, because a competitive firm is a expense taker, its MR is equal to the market bell Note In essence, because the firms marginal-cost curve determines the quantity of the good the firm is willing to yield at any impairment, it is the competitive firms sum up curve upstandings short-run closing to Shut Down * Shut- mass refers to short-run decision to not produce anything during a specific period of time b/c of current market conditions.* slip away refers to a long-run decision to leave the market * Firm that shuts down temporarily still has to invent fixed costs, whereas a firm that exits the market saves fixed costs and variable costs * i. e.if husbandman decides not to produce crops one season, rent for land becomes sunk cost, but if farmer decides to sell farm altogether, no sunk costs * Firm shuts down if total revenue from production is little(prenominal) than its variable costs of production * Shut down if TR VC * Alternatively, shut down if TR/Q VC/Q .* Which means, shut down if P AVC * On graph, if market price is slight than minimum period of time on AVC curve, firm shuts down and ceases p roduction firm can re-open if market price changes to be higher than minimum point * Therefore, point at which MC intersects AVC is the shutdown price * If a firm shuts down temporarily, its fixed costs are sunk costs * Firm can safely ignore these costs when deciding how much to produce * i. e. why dont many restaurants close down at lunch time when they are nearly empty?* Because the fixed costs (rent, kitchen equipment, plates, silverware etc. ) would still have to be paid, only the variable costs (cost of additional food and wages to stuff) would be saved * Owner can incur enough profit to cover these variable costs, and therefore, keeps the restaurant open Firms long-term Decision to Exit or Enter a food market * The firm exits the market if the revenue it would get from producing is less than its total costs * Exit of TR TC * Alternatively, exit if TR/Q TC/Q * Which means, exit if P ATC and enter if P ATC * Therefore, point at which MC intersects ATC is the exit/ entre e price beat Profits from Graphs * Recall, Profit = TR TC.* Alternatively, Profit = (TR/Q TC/Q) x Q * Which means, Profit = (P ATC) x Q The Supply Curve in a competitory Market * So far we have examined supply decision of single firm now examining supply curve of market * Two possibilities short term = fixed number of firms, long term = firms can enter and exit The Short-Run Market Supply with a Fixed Number of Firms * In short-run, the number of firms in the market is fixed * As a result, the market supply curve reflects the individual firms marginal-cost curves, only with increase magnitude (both graphs same, but market quantity multiplied by some scalar value) The Long-Run Market Supply with Entry and Exit.* Assume all firms and all authority firms have same cost curves * If firms already in market are profitable, sore firms will have inducing to enter the market * Entry if P ATC because profit is positive (recall, Profit = (P ATC) x Q) * Entry = expand of firms, incr ease quantity of good supplied, and drive down prices and simoleons * If firms already in market are experiencing losses, firms may exit the market * Exit if P ATC because profit is negative * Exit = decrease of firms, decrease quantity of good supplied, and drive up prices and profits * At the end of this butt of debut and inhabit, firms that remain the market must be making zero frugal profit * In other words, the process of doorway and exist ends only when price and average total cost are drive to equivalence (P = ATC).* This has a surprising implicationwe earlier noticed that firms produce so that P = MC * We just noted that free entry and exist forced P = ATC * The only way this can occur is of MC = ATC, and this occurs only when the firm is ope symmetrynal at the minimum of average total costcalled the efficient scale * ?long-run equilibrium of a competitive market with free entry and exit must have firms operating at their efficient scale * Long-run supply curve (m arket) will be horizontal at the price which corresponds to the minimum of average total cost * Any P above this level generates profit, leading to entry and increase in total quantity supplied * Any P (price) to a lower place this level creates losses, leading to exit + decrease in total quantity supplied * Eventually, number of firms in market adjusts so P = minimum of ATC, and there are enough firms to satisfy all the hold at this price Why do competitive firms stay in business if they make zero profit?* Remember that stinting profits are not the same as accounting profits * Economic profit accounts for opportunity cost as well * So, when a firm makes zero economic profit, it may still be making accounting profits A Shift in admit in the Short Run and Long Run * Because firms can enter and exit more easily in the long run than in the short run, the long-run supply curve is typically more fictile than the short-run supply curve Chapter 15 Monopoly Why Monopolies Arise.* Firm i s monopoly if it is sole seller of its product and if its product has no close substitutes * Case of monopoly is barriers to entry a monopoly remains only seller in a market because other firms cannot enter market and repugn with it * Barriers to entry are monopoly resources, government-created monopolies, and essential monopolies Monopoly Resources.* Single firm owns a bring up resource * i. e. only one well in town and no way to get water from anywhere else * Rarely occurs because economies are large and resourced owned by many pile Government-Created Monopolies * Government gives one soulfulness or firm exclusive right to sell good or service * Two important examples are patent and copyright laws * some(prenominal) lead to higher prices than under contest, but encourage desirable demeanour * Drug companies giveed patents to encourage research, and authors allowed copyrights so they write more original books * Monopoly = increased incentive for creative activity, but at a higher cost indwelling Monopolies.* Single firm can supply good or service to entire market at lower cost than could 2 or more firms * Occurs when firm has economies of scale over relevant kitchen stove of output * In other words, firms ATC curve continually declines because when production is divided among more firms, each firm produces less, and ATC rises single firm can produce as smallest cost * i. e. to provide water to town, firm must build network of water pipes if two firms involved, both would have to pay fixed cost of water pipe, resulting in increased ATC.* Natural monopoly = less concern intimately new entrants * Normal monopolys profits attract entrants to market, but in a essential monopoly, new entrants cannot get to same low costs that monopolizer enjoys * If a market expands (greater get) pictorial monopoly can evolve into competitive market Monopoly vs. Competition.* Monopoly can influence market price of output, while competitive firm cannot * As monopol y is sole maker in market, it can alter price of good by adjusting supply to market * subscribe curve for competitive market is perfectly elastic (can sell as little or as much as it wants at one price), while down-ward sloping for monopoly * ? monopoly has to accept lower price to sell more output, and can only accept higher price by selling less output so what price and quantity will it choose to maximize profits? Monopolys Revenue * AR = price of good (true for monopoly and competitive), but MR is not equal to price of good.* As a result, average-revenue curve is also monopolizers pauperization curve * When monopoliser increases quantity sold, has two effects on total revenue (P x Q) 1) the output effect = more output sold, so Q is higher, which trends to increase total revenue 2) the price effect = price falls, so P is lower, which tends to decrease total revenue * Competitive firm as no price effects price taker, therefore can sell as little or as much as it wants, witho ut any change in price * ?Output/price effect causes monopolists MR after first unit sold to always be less than price of the good * Consequently, monopolys marginal-revenue curve always lies below its demand curve Profit Maximization * Profit-maximizing quantity of output as determined by intersection of MR and MC curve * Some light upon differences between monopolies and competitive firms * P = MR = MC (competitive).* P MR = MC * In competitive markets, price equals marginal cost, and in monopolized markets, price exceeds marginal cost crucial to understanding the social cost of monopoly Monopolys Profits * Recall, Profit = TR TC * Alternatively, Profit = (TR/Q TC/Q) x Q * Which means, Profit = (P ATC) x Q * selfsame(prenominal) as in competitive markets Monopoly Drugs vs. Generic Drugs * What happens to price of a medicine with patent runs out? * Monopoly firm maximizes profit by producing quantity at which MR = MC, and charging price well above MC * Therefore, when paten t runs out, the price of the good falls to MC * Note MC for drugs is almost always constant.* monopolist does not lose all market, however, because many buyers remain loyal to mark off-name, and therefore, brand-name can still sell at slightly higher price than generic wine brands eudaemonia Cost of Monopoly * Monopolies = higher prices than competitive firms = undesirable for consumers = desirable for manufacturers in terms of total revenue * Is it possible that monopoly is desirable from the standpoint of ordination as a whole?* Recall total nimiety measures wellbeing of buyers and sellers in a market * Producer excessiveness is amount manufacturing businesss start out for a good (minus) their costs of producing it * Consumer otiose is consumers willingness to pay for a good amount they actually pay for it * In this case, single manufacturing business is monopolist The Deadweight Loss * Consider case of a benevolent social contriver.* accessible planner care not only about profit earned by firms owners, but also benefits receive by the firms consumers * Planner tries to maximize total surplusage, which is producer surplus (profit) plus consumer surplus * Alternatively, value of good to consumers costs of making the good to monopoly producer * Demand curve reflects value of good to consumers *.Marginal cost curve reflects cost to the monopolist * Consequently, the socially efficient quantity is found were the demand curve and marginal-cost curve intersect * If social planner were running the monopoly, he would achieve efficient outcome by charging the price found at the intersection of demand curve (AR-curve) and the MC curve much like a competitive market * However, monopolists charge the price found at the intersection of the MC and MR curve * ?the monopolist produces less than the socially efficient quantity of output, and charges more than the socially efficient price * When the monopolist charges a price higher than the marginal cost, so me potential consumers value the good higher than the MC but lower than the monopolists price * Consumers do not buy the good, and monopoly pricing prevents in return beneficial trade * The deadweight loss triangle = total surplus incapacitated = reduction in economic well-being from monopoly Is Deadweight Loss a Social caper?* Not necessarily a problem for society * well-being in monopolized market includes welfare or both consumers and producers * When a consumer pays redundant dollar to producer because of monopoly price, consumer is worse off by a dollar, and producer is better off by same amount * Transfer from consumer to producer does not affect total surplussum of consumer and producer surplus * Unless, consumers are for some reason more deserving than producersa normative judgement about equity that goes beyond trulym of economic efficiency.* Problem arises because firm produces and sells a quantity of output below the level that maximizes total surplus Price dispar ity * Business convention of selling the same good at different prices to different consumers * Can occur in a monopoly (firm with market power), not in a competitive market * In competitive market, many firms selling same good at market priceno one would lower market price for any guest as they can sell any given quantity at one price * Increasing price would also be pointless, as customer would simply buy from another firm A Parable about Pricing.* Dry-cleaning example from class charge adults $10 and charge students $5 with a stdent card * Choosing to forgo market of students at $5 results in deadweight loss because students do not end up putting their shirts into dry-cleaning, though they value the service more than its MC of production * With price- inconsistency, however, every(prenominal)one ends up with a shirt .* Price variety can abolish the inefficiency inherent in monopoly pricing, because differentiating prices allows producer to charge customer price immediate to customers willingness to pay than is possible with a single price Notes about Price-Discrimination * Monopolist must be able to separate customers fit in to willingness to payeither geographically, by age, by income etc.* Arbitrage prevents price- disagreement process of buying good in one market at a low price and selling it in another market for a higher price * Increased welfare from price-discrimination is all higher producer surplus, not consumer surplus * Adults/students no better off from having cleaned shirtspaid price they were willing to pay * Entire increase in total surplus is a result of higher profits for the monopolist The Analytics of Price Discrimination.Perfect price discrimination = situation in which a monopolist knows on the button the willingness to pay of each customer and can charge each customer different prices accordingly * Monopolist gets the enter surplus in every transaction * Also sometimes referred to as first-degree price discrimination * make to diagrams (a) and (b).* (a) firm charges single price above MC, and b/c some potential customer who values good at more than MC does not buy it at this high price, monopoly causes deadweight loss * (b) each customer who values good at more than MC buys good and is supercharged willingness to pay mutually beneficial trade takes place, no deadweight loss, and entire surplus derived from market goes to monopoly producer in form of profit * Of course, in real life, price discrimination is never perfect because various customers are willing to pay various different prices two forms of imperfect price discrimination .* 1) second-degree price discrimination = charging different prices to same customer depending on quantity of product bought * 2) third-degree price discrimination = market can be part and segments have different elasticities of demand * i. e. movie theatres charge lower price for children and senior citizens than for other patrons * Makes little sense in a competitive market, where price = MC, and MC for providing seat to child/senior citizen is same as anyone else.* If movie theatre has local monopoly, however, price-discrimination has motives * Demand curve for adults is less elastic, therefore can charge higher price, whereas demand curve for children/seniors is more elastic, therefore can charge lower price * How does imperfect price discrimination affect welfare?* Compared to monopoly outcome with single price, imperfect price discrimination can raise, lower, or leave unchanged total surplus in a markethowever, always raises monopolys profits Examples of Price Discrimination * Airline Prices charge less if stay over Saturday night or purchase two weeks ahead to separate personal travellers, from business travellers, who pay more * Discount Coupons rich, busy executive will not rationalize coupons, whereas a unemployed individual will, allowing price discrimination * Financial assistant separate wealthy students willing to pay high tuit ion from less well-off students * Quantity Discounts bulk is cheaper because customers willingness to pay for an additional unit declines as the customer buys more units Public Policy towards Monopolies.* Monopolies function to allocate resources efficiently * Produce less than socially desirable quantity of output * Charge prices above marginal cost Policymakers retort * Increasing Competition with Competition Law for example, mergers * Regulation natural monopolies not allowed charging whatever price they want, but what price should government set of a natural monopoly? * One might conclude set P = MC, so customers equal quantity of output that maximizes total surplus, and allocation of resources is efficient * However, natural monopolies always have declining ATC ?MC ATC, if P = MC, then P ATC, and firm loses money and exits industry * Government can subsidize monopolist and pickax up losses inherent to MC-pricing, but would take away to raise money through taxation for subsidy, and taxes have own deadweight loss * Alternatively, regulators can allow monopolist to charge price higher than MC, and if regulated P equals ATC, monopolist earns exactly zero economic profit * Yet, average-cost pricing leads to deadweight losses b/c monopolists price no longer reflects MC or producing good * Ultimate problem with MC- and AC-pricing is it gives monopolist no incentive to reduce costsnormally reduce costs to increase profits, but in these cases, monopolist will not benefit * Solution keep some benefits from lower costs in form of higher profit, and practice something that is a small departure from MC-pricing.* Public Ownershipgovernment owns natural monopoly instead of private firm * Doing Nothingdegree of market sorrow in economy smaller than political failure in govt Differences and Similarities Competition Monopoly Similarities Goal of firms Maximize profits Maximize profits normal for maximizing MR = MC MR = MC Can earn economic profits in short run? Yes Yes Differences Number of Firms many another(prenominal) One Marginal Revenue MR = P MR P Price P = MC P MC Produces welfare-maximizing level of output? Yes No Entry in long run? Yes No Can earn economic profits in long run? No Yes Price discrimination possible? No Yes Chapter 16 Monopolistic Competition.* Oligopoly market structure in which only a few sellers offer similar or identical products * Concentration ratio percentage of total output in market supplied by four-spot largest firms * Monopolistic competition market structure in which many firms sell products that are similar but not identicalfollowing qualities * Many sellers ? firms competing for same group of customers.* Product differentiation ? downward-sloping demand curve * Free entry and exit ? market adjusts until economic profits driven to zero Monopolistically Competitive Firm in the Short Run * Products are different ? faces downward-sloping demand curve * Same profit maximization rule as monopoly (Q at MR = MC and equivalent P on demand curve) * Identical to monopoly The Long Run Equilibrium.* When firms make profit in the short-run, new firm have incentive to enter the market * Demand curve shifts to left (reduces demand of each individual firm) * As demand for firms fall, firms experience declining profit * Conversely, when firms incur losses in short-run, firms exit * Demand curves shift to right (demand experienced by individual firms increases) * As demand for firms products rises, firms experience rising profit.* Entry/exit have-to doe withs until firms in market make zero economic profit (P = ATC) * Demand curve is tangent to ATC (just touching, never crossing) * Characteristics of long-run equilibrium in monopolistic competition * As in monopoly market, P MC (for profit maximization, MR = MC, and downward-sloping demand curve makes MR P) * As in competitive market, P = ATC (free entry and exit drive economic profit to 0) Monopolistic vs. Perfect Competition Excess Ca pacity.* Entry and exit drive each firm in monopolistically competitive market to point of tangency between demand and ATC curves * However, this means quantity produced is less than that produced at the efficient scale quantity that minimizes ATC (point at which MC intersects with ATC) * Perfectly competitive firms produce at the efficient scale * Monopolistically competitive firms therefore have excess capacitythey are not producing as much as they potentially can * Firm forgoes opportunity to produce more because it would need to cut prices to sell the additional output * More profitable to continue operating at excess capacity Markup over Marginal Cost.* family between Price and Marginal Cost also different * Competitive firm, P = MC * Monopolistic competition, P MC, because it must be for P = ATC * This leads to behavioural differences b/w perfect and monopolistic competitors * Perfectly competitive firm does not care for additional customers because P = MC, profit from extra unit sold is always zero * By contrast, monopolistically competitive firms P MC, therefore, extra units sold = more profit Monopolistic Competition and Welfare of Society * One source of inefficiency is that P MC * Some consumers who value good at more than MC, but less than P will not buy the good * ? deadweight loss similar to that of monopoly pricing * some other source of inefficiency is1) Product-variety outwardness b/c consumers get some consumer surplus from introduction of new product, entry of new firm conveys +ve externality on consumers 2) Business-stealing externality b/c other firms lose customers and profits from entry of a new competitor, entry of new firm imposes negative externality on existing firms * Perfectly competitive firms produce identical goods and charge P = MC, therefore neither externality exists under perfect competition * ?Monopolistically competitive markets do not have desirable welfare properties of perfectly competitive markets because it is no t ensured that total surplus is maximized * Also very difficult to control these inefficiencies through public policy Advertising *Amount of denote depends on products * Firm that sells highly differentiated consumer goods i. e.soft drinks, will need to spread abroad more than seller of undifferentiated industrial nails, or homogenous products like wheat * Some people critique advertising for convincing people that products are more different than they actually are, fostering brand faithfulness and encouraging consumers to ignore price differences * With less elastic demand curve, firm charges larger markup over MC.* Support for brands suggests that brands provide consumers with information about eccentric of goods, and gives firms incentive to maintain high quality to protect reputation of brand names * Others believe encourages competition as it makes customers better informed about products * Advertising can signal quality of product as well, because firm willing to spend mon ey on advertising must be creating a good product.