Chapter 23- There are four major characteristics of the perfect competition market structureo A large number of buyers and sellerso Homogeneous producto Unimpeded industry exit and entryo Equally good information for both buyers and sellers- Because in the perfect competition model many firms produce a homogeneous product, a single firm’s demand curve is perfectly elastic at thegoing market price.- In order to predict how much the perfect competitor will produce, we assume that it wants to maximize profitso Total revenues = quantity sold X price per unito In the short run total costs = total fixed costs + total variable costso Total profits = total revenues – total costso Marginal revenue = change in total revenue / change in outputo Total profits is maximized when marginal revenue = marginal cost- Because the normal rate of return to investment is included in the average total cost curve, the profits we calculate are economic profits- The firms short run shutdown price occurs at its minimum average variable cost value: at a higher price, the firm should produce and contribute to payment of fixed costs. The firm should not produce at a lower price- The firms short run break even price is found at the minimum point on its average total cost curve. At a higher price the firm will earn abnormal profits,at a lower price it suffers economic losses, and at the minimum point, economic profits equal zero- The firms short run supply curve is its marginal cost curve above the short run shutdown point- The short run industry supply curve is derived by summing horizontally all the firm supply curves. The industry supply curve shifts when non price determinants of supply change- In a perfectly competitive market, the going price is set where the market demand curve intersects the industry supply curve- In the long run, because abnormal industry profits induce entry and because negative industry profits induce exit, firms in a perfectly competitive industry will earn zero economic profitso Long run supply curves relate price and quantity supplied after firms have time to enter or exit from an industryo A constant cost industry is one whose long run supply curve is horizontal because input prices are unaffected by outputo An increasing cost industry is one whose long run supply curve is positively sloped because the price of specialized (or essential) inputs rises as industry output increaseso A decreasing cost industry is one whose long run supply curve is negatively sloped because specialized input prices fall as industry output expands- In a perfectly competitive industry, a firm operates where price = marginal revenue = marginal cost = short run minimum average cost = long run minimum average costs in the long runo Perfectly competitive industries are efficient from society’s point of view because for such industries price equals marginal cost in long run equilibriumo They are also efficient because in long run equilibrium the output rateis produced at minimum average costo The perfectly competitive model is not a realistic description of any real world industry. Nevertheless, the model of perfect competition helps economists explain and predict economic eventsChapter 24o A monopolist is a single supplier that constitutes an entire industry. The monopolist produces a good for which there are no close substituteso Barriers to entry are impediments that prevent new firms from entering an industry. There are numerous potential barriers to entryo Some monopolists gain power through the exclusive ownership of a raw material that is essential to produce a goodo Licenses, franchises, and certificates of convenience also constitute potential barriers to entryo Patents issued to inventors constitute, for a time, effective barriers to entryo If economies of scale are great relative to market demand, new entrants into an industry will be discouraged. Persistent economies of scale could lead to a natural monopolyo Governmental safety and quality regulations may raise fixed costs to firms in an industry significantly enough so as to deter new entrantso If tariffs on imports are sufficiently high, then producers can gain some measure of monopoly powero The monopolist faces the industry demand curve because the monopolist is the entire industry. Examples of monopolies include local electric power companies and the post officeo It is instructive to compare the monopolist with the perfect competitoro The perfect competitors demand curve is perfectly elastic at the going priceo The monopolists demand curve is negatively sloped. Price falls, and therefore marginal revenue is less that price because the monopolist must lower its price on all the units it sells and not just on the marginal unito Where marginal revenue = zero, total revenue is maximized; at the point on the demand curve corresponding to zero marginal revenue, the priceelasticity of demand equals 1. At higher prices (lower outputs) demand is elastic, and at lower prices (higher outputs) demand is inelastico By assuming that the monopolist wants to maximize total profits and that theshort run cost curves are similar in shape to those of the perfect competitor, we can determine the monopolists optimal output price combinationo The monopolists total revenue curve is nonlinear (unlike the perfect competitors). Profit maximizing output is reached at a rate at which the positive difference between total costs and total revenues is maximizedo Stated differently, optimal output exists where MR = MCo If MR>MC the firm can increase total profits by increasing output. If MC>MR then the firm can increase total profits by reducing outputo Once the profit maximizing output is determined, the monopolist’s price is already determined. The price is determined on the demand curve at that quantityo Graphically, total profits are calculated by subtracting average costs from price and multiplying that value by the quantity producedo If its average cost curve lies entirely above its demand curve, the monopolist will experience economic losseso If the monopolist can prevent the resale of its homogeneous output and if it can separate its customers into different markets with different price elasticity, then it can price discriminate- earn higher profitso Monopolies are inefficient because they charge a price that is too high (P>MC) and because they produce an output that is too slowChapter 25o There are four characteristics of the theory of monopolistic