ECON 202 1nd Edition Lecture 25 Outline of Last Lecture I. Perfectly Competitive Industriesa. Profit Maximizationi. In Perfectly Competitive Industries1. Short RunOutline of Current Lecture II. Perfectly Competitive Industriesa. Profit Maximizationi. In Perfectly Competitive Industries1. Long RunIII. Monopolya. Causes of MonopolyCurrent LecturePerfectly Competitive IndustriesLong RunTwo Types of adjustments firms can make in the long run but not in the short run1. Entry and ExitEx: Suppose perfectly competitive firms are making short run profitsThese 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. Q2Q1S2p1p2d2 =mr2$Pmcqd1 =mr1ATCq1P1S1P2D1q2FirmIndustryIn a perfectly competitive industry if firms are making short run profits, new firms will enterTherefore market supply increases and profits will fall until π = 0The reverse of this occurs if firms are making a loss in the industry2. Scale AdjustmentsFirms can maximize profits by adjusting to the minimum point on their Long Run Average Total Cost curveThereforeLong Run Competitive Equilibrium Conditions1. Price = Marginal Cost (Allocative Efficiency)2. Price = minimum Long Run Average Total Cost (Productive Efficiency)Monopolies- a single seller of a good with no close substitutesCauses of a Monopoly 1. Natural Barriers to Entrya. Control of a scarce resourceb. Technical superiorityc. Economies of scale2. Government Created Barriers to EntryQ1p1$Pmcqd1 =mr1LRATCq1P1S1P2D1FirmIndustrya. patents – gives protection from competition so firms can earn higher than average profits for a certain length of time; gives incentives to do researchSince Monopolists are the only sellers in an industry they face the market demand curveWhenever a firm faces a downward sloping demand curve:1. Price is greater than marginal revenue2. The firms marginal revenue curve lies below its demand curvePrice Quantity Total Revenue Marginal Revenue$20 0 $0 -$18 1 $18 $18$16 2 $32 $14$14 3 $42 $10Ex: Suppose a firm sells 5 units/month when Price = $100. To sell 6 units/month price must = $95Marginal Revenue of the 6th Unit:Output Effect: Gain in Revenue = P2 × ΔQ = $95Price Effect: Lost Revenue = ΔP × Q1 = $25Marginal Revenue = $70PDQDemand curve faced by
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