ECO2030 1nd Edition Lecture 32 Outline of Last Lecture I. When a firm should Enter or Exit the Market Outline of Current Lecture II. Measuring Profit III. Long run vs short run decisions IV. Monopolies Current Lecture Measuring Profit: ● if P>ATC = profit ○ Profit = TCTC=(PATC)xQ ● if P<ATC = loss ○ Loss=TCTR=(ATCp)xQ (negative profit) You can just do the area of the rectangle to get the profit! but know the above methods to calculate it without the presence of the graphs Since the Price is < the ATC profit is negative meaning there is a loss Profit maximization ● Long run Exit if TR<TC or P<ATC ● Enter if TR>TC or P>ATC 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.● Long Run Process of entry and exit only ends when economic profit = 0 ○ Remember this includes the implicit costs so accounting profit is positive In a Competitive Market firms long run supply curve ● in the longrun, a firm's supply curve is its MC curve which is above the ATC. If price falls below ATC firm should exit the market! ● In the short run number of firms is fixed ● Each firm should supply quantity where P=MC ● (for P>AVC the supply curve is the MC curve) ● The Market supply is the sum of all quantity supplied from each firm In the Long Run firms will enter and exit the market until profit = 0. This results in the price being equal to the minimum ATC. The long run market supply is then inelastic or horizontal! ● Competitive firms still can stay in business when profit = 0 ● This is because Profit = TRTC ● And TC includes all opportunity costs including the Implicit costs ● This means that accounting profit is positive if economic profit is 0 Increase in Demand ● in the short run higher quantity sold, higher price (P>ATC = positive economic profit) ● This is a result from the demand curve shifting right. ● Long run Firms will enter the market because P>ATC and the price will decrease back to the Minimum ATC (where profit = 0) ● Quantity still increases because of new firms in the market As you can see, in the long run the price = 0 because new firms enter the market. Chapter 15: Monopolies Why Monopolies arise ● Monopoly firm that is the sole seller of a product without close substitutes ○ Firm is a Price Maker ● Barriers to entry ○ Monopoly resources Monopolies often have control over certain resources ○ Government regulation governments give a single firm the right to produce a good or service ○ The production process a single firm can produce output at a lower cost than can a larger number of producers ○ Natural Monopoly a single firm can supply a good or service to and entire market as a smaller cost than two or more firms could ■ Economies of scale over the relevant range of output ■ Club Goods excludable but not rival in consumption ○ For monopoly’s The ATC will always decrease when quantity produced is increased ■ This is why we allow Natural Monopolies to exist ● Monopoly ○ Price Maker ○ Sole Producer ○ Downward sloping Market demand curve (entire demand) ○ The only way a monopolist can increase quantity output is to lower the price ● Competitive firms ○ Price Takers ○ One of many producers ○ Demand is a horizontal line (price)
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