Imperfectly competitive firms have some ability to set their own price they are price setters 3 30 15 In the long run economic profits possible Reduce economic surplus monopoly has market power has to determine price and how much to sell at that price Has only one seller with no close substitutes Monopolistic competition has many firms producing slightly differentiated products that are reasonably close substitutes Oligopoly has a small number of large firms producing products that are close substitutes law of demand buyers buy less when price goes up and more when price goes down Price Quantity the MR curve is always below the MR demand curve 11 MR MC 10 10 8 9 You find price on the demand curve 8 6 consumer surplus is above price line 4 7 2 6 5 0 2 4 3 4 TR P x Q 0 10 18 24 28 30 30 28 24 producer surplus is below price line and above MC curve 0 1 2 3 4 5 6 7 8 Q f L K Monopoly Profit f 2L 2K 2f L K f 2L 2K 2f L K Profit Total Revenue Total Cost Total Cost ATC x Q Profit P x Q ATC x Q Profit P ATC x Q If P ATC the firm earns a profit If P ATC the firm suffers a loss vs Price Discrimination Monopoly s can charge different groups of people different prices for the same thing Monopoly MC MR P MR P MC Deadweight loss Decides Quantity Price Perfectly Competitive Market MC MR P MR P MC No deadweight loss Sellers only decide Quantity to sell at given price Price discrimination charging different buyers different prices or the same good or service separate the groups no side trades among buyers EX Car insurance the price of car insurance is different for different age groups and different genders Many forms Hurdle Method discounts for identifiable groups ex students AARP EX senior citizen discounts Perfect Discrimination negotiate separate deals with each customer charge each buyer their reservation price the goal is the extract consumer surplus total profit is much higher Reservation Price is the price each person is willing to pay The Hurdle Method practice of offering a discount to all buyers who overcome some obstacle Ex mail in a rebate Monopoly and public policy Challenge create the greatest increase in total surplus Policy options Gov ownership and operation regulation competitive bids To illustrate consider a production process for which total cost is given by the equation TC F M Q where F is fixed cost M is marginal cost assumed constant in this illustration and Q is the level of output produced For the production process with this simple total cost function variable cost is simplyM Q the product of marginal cost and quantity Average total cost ATC TC Q is equal to F Q M AsQ increases average cost declines steadily because the fixed costs are spread out over more and more units of output
View Full Document
Unlocking...