SV151 Principles of Economics K Christ 16 20 January 2012 Costs Curves and Their Shapes A complicated version of the story Cost C A simpler version of the story TC C q a bq cq2 dq3 Cost C TC C q a bq cq2 TVC TFC q Cost C q Cost C ATC MC MC AVC ATC AVC AFC Mankiw Chapter 12 Figure 5 q AFC Mankiw Chapter 12 Figure 4 q Returning to the Issue of Profit Maximization p q R q C q dp q dq dR q dq dC q dq dp q dq MR MC MR MC For a price taker marginal revenue MR is constant Revenue R and Cost C Revenue R and Cost C MC MC MR Price Taker q q The profit maximizing optimal output level MR Price Taker q q Returning to the Issue of Profit Maximization p q R q C q dp q dq dR q dq dC q dq dp q dq MR MC MR MC For a price maker marginal revenue MR is declining as a function of q Revenue R and Cost C Revenue R and Cost C MC MC MR Price Maker q MR Price Maker q The profit maximizing optimal output level q q Equilibrium in a Competitive Market The market determines the price that the price taker takes The cost function determines whether the firm makes a profit or incurs a loss Profits attract new competition free entry condition Zero profit is normal profit The Market The Firm Price P Revenue R and Cost C S S MC P ATC AVC P MR Price Taker D Q q q q Short Run Firm Supply Functions and Supply Curves P MC ATC Operate at a profit AVC MR AR d Continue operations at a loss Break even Shut down q q q Short Run Firm Supply Functions and Supply Curves Industry Supply Firm Supply costs of inputs Qs qsi where qsi f p w i prices of output Technology of production and industry structure P Firm 1 P Firm 2 P q1 Firm 3 P q2 Industry S MC3 MC2 MC1 Conditions of industry supply q3 Q Long Run Industry Supply Constant Cost Industry Horizontal long run industry supply P P The Firm The Market MC ATC S S Long run industry supply P D q q Q D Q Long Run Industry Supply Increasing Cost Industry Long run industry supply slopes upward P P The Firm The Market MC MC ATC S ATC S Long run industry supply P D q q Q Q D Q Long Run Industry Supply Decreasing Cost Industry Long run industry supply slopes downward P P The Firm The Market MC S S ATC MC ATC P Long run industry supply D q q Q Q D Q Monopoly and Market Power Monopoly Market power Rent seeking Collusion A firm that is the sole seller of a product without close substitutes Sources of Monopoly and Market Power Barriers to Entry Control of a key resource Government policy Natural monopoly Extreme Economies of Scale Cost ATC Quantity of Output Equilibrium in a Monopolized Market Even for a monopolist the demand curve still determines price The cost function determines the amount of profit that the monopolist makes Barriers to entry preserve positive abnormal profits Dead weight loss summarizes the inefficiency of monopolization For a price maker marginal revenue MR is declining as a function of q Revenue R and Cost C MC ATC PM D ATC MR Price Maker QM Q The standard case against monopoly Monopolies restrict output and thus cause prices to rise above competitive levels Monopolies generate social welfare losses F F Monopolies are likely to engage in anti competitive practices to sustain their advantage Rent seeking Social Responses to Monopoly Power Anti trust laws Regulation Public Ownership Nationalization Do Nothing Taxonomy of Market Structures Imperfect Competition Monopoly Joint Profit Max Oligopoly Monopolistic Competition Perfect Competition Many Many Number of Firms One Few Type of Product Unique no substitutes Unique or Differentiated Differentiated Homogenous undifferentiated Conditions of Entry Significant barriers to entry Significant barriers to entry Insignificant barriers to entry Free entry and exit Price Makers Price Takers Some Tentative Conclusions About Market Structure Allocative efficiency Productive efficiency Economic profits