ECON 251 1st Edition Lecture 16Outline of Last Lecture I. TermsII. CostIII. Relationship Between MC and ATCIV. Long Run CostsV. Four Types of IndustryVI. Two Measures of ConcentrationOutline of Current Lecture I. TermsII. Perfect CompetitionIII. Maximize ProfitCurrent LectureI. TermsMarginal Revenue: additional revenue from one more unit of outputII. Perfect CompetitionCensus of Manufactures (2007 data)Industry # Firms CR HHIBreakfast Cereal 35 80.4 2425.5 Oligopoly (would not allow any mergers)Ice Cream 347 52.7 954.1 Monopolistic CompetitionAuto 174 67.6 1448.8Machine Shops 20995 1.7 2.6 Perfect CompetitionCharacteristics1. Many firms (low CR/HHI values)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. Products are PERFECT substitutes (consumer don’t have any popular preferences, meaning they will immediately switch to whoever has the lowest price)- Ɛd = ∞ “perfectly elastic” demand- Demand curve facing an individual firm is horizontalLeft: Graph of the MarketRight: Graph of an Individual Firm- Each firm has an identical graph- “price takers”3. NO barriers to entryThree Categories:a. Legali. Licensesii. Patentsiii. Copyrightsiv. Trademarksb. Naturali. Control of a scarce resourcesii. Cost of advantageiii. “natural monopoly”c. Artificiali. Threats to potential firmsii. Advertising (convinced consumers that you are the only producer of the safest, etc. products)III. Maximize ProfitProfit (∏) = total revenue (TR) – total cost (TC)Increase production by one unitIncrease TC by MCIncrease TR by MRMarginal Revenue = ΔT/ΔQIF MR > MC => inc Q to inc ∏IF MR > MC => dec Q to inc ∏IF MR = MC => maximized profitq TC TR MC MR ∏0 10 0 - - -101 15 10 5 10 -52 20 20 5 10 03 27 30 7 10 34 36 40 9 10 45 47 50 11 10 36 60 60 13 10 0Bold = max profitIncreasing FC by $10:q TC TR MC MR ∏0 10 0 - - -201 15 10 5 10 -152 20 20 5 10 -103 27 30 7 10 -74 36 40 9 10 -65 47 50 11 10 -76 60 60 13 10 -10MC is NOT affected by the changeIF TR > VC => stay in businessIF TR > VC => shut down IF TR = VC => “shut down point”IF P > AVC => stay in businessIF P < AVC => shut down IF P = AVC => “shut down
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