Introduction to Economics Microeconomics The US Economy Llad Phillips 1 13 Tuesday Nov 12 Lecture Thirteen Profit maximization market structure and perfect competition Reading Assignment O Sullivan and Sheffrin Ch 9 Perfect Competition Short Run and Long Run Ch 6 Market Effi ciency and Government Intervention Problems O S Text p 207 208 1 2 3 4 5 6 7 14 Tuesday Nov 14 Lecture Fourteen Monopoly and Antitrust Policy Reading Assignment O Sullivan and Sheffrin Ch 10 Monopoly O Sullivan and Sheffrin Ch 13 Using Market Power Price Discrimination and Monopoly Ch 14 Controlling Market Power Antitrust Policy and Deregulation Problems O S Text Llad Phillips p 232 3 1 2 3 4 5 6 7 8 9 10 2 Your Readings and the Text s Slide Shows Short Run Total Cost Short Run Production Costs Output Rakes per Minute STC FC TVC Total Cost Total Fixed Cost Total Variable Cost 2003 Prentice Hal l Bu sin ess Publishing Llad Phillips Fixe d Cos t FC Tota l Variable Cos t TVC Short Run Tota l Cost STC 0 36 0 36 1 2 36 36 8 12 44 48 3 36 15 51 4 5 36 36 20 27 56 63 6 36 36 72 7 8 36 36 48 65 84 101 9 36 90 126 10 36 130 166 Economics Principle s and Tools 3 e O Sul liva n S heffrin 3 Chapter 8 Short run Average and Marginal Costs An Example Short Run Production Costs Output Rakes per Minute 2003 Prentice Hal l Bu sin ess Publishing Llad Phillips ShortRun Marginal Cos t SMC Average Fixe d Cos t ShortRun Average Variable Cos t ShortRun Average Tota l Cos t AFC SAVC SATC 0 1 8 00 36 00 8 00 44 00 2 4 00 18 00 6 00 24 00 3 4 3 00 5 00 12 00 9 00 5 00 5 00 17 00 14 00 5 7 00 7 20 5 40 12 60 6 7 9 00 12 00 6 00 5 14 6 00 6 86 12 00 12 00 8 17 00 4 50 8 13 12 63 9 10 25 00 40 00 4 00 3 60 10 00 13 00 14 00 16 60 Economics Principle s and Tools 3 e O Sul liva n S heffrin 4 Outline Lecture Fourteen The competitive firm the short run capital fixed the long run all factors variable The monopolistic firm Llad Phillips 5 Competitive Firm Short Run Capital i e plant and equipment are fixed hence there are diminishing returns as labor is increased output increases but less than proportionally so labor costs i e variable costs increase more rapidly than output so average variable cost i e variable cost per unit of output is rising which means marginal cost is rising even faster bringing up the average Llad Phillips 6 Short Run Average Variable Cost Curve Cost per unit of output marginal cost per unit of output average variable cost per unit of output A output Llad Phillips 7 Behavior of the competitive firm in the short run shut down decision The firm is one of many firms Hence it has no monopoly power It takes the market price as given if it tries to charge a higher price nobody buys its output If the market price is less than minimum average variable cost the firm shuts down Llad Phillips 8 The Shut Down Decision Cost per unit of output marginal cost per unit of output Average variable cost per unit of output Market price A Shutdown output s Llad Phillips output 9 Behavior of the competitive firm in the short run the output decision If the market price is above minimum average variable cost the firm produces It produces the output where the market price equals marginal cost So the value of a unit of output to the consumer is equal to the cost of producing that last unit marginal cost the only remaining question is whether the firm is making money Llad Phillips 10 The Output Decision Cost per unit of output marginal cost per unit of output average variable cost per unit of output Market price A Output produced Llad Phillips output 11 Fixed Costs Fixed costs do not vary with output but are constant for example rent insurance etc Hence average fixed costs fall as output increases This is known as spreading the overhead The sum of average fixed cost and average variable cost equals average total cost Price minus average total cost is the profit per unit of output Llad Phillips 12 Variable Cost Variable Cost B Fixed Cost A Fixed Cost per unit output Average Variable Cost AVC Marginal Cost MC Average Fixed Cost AFC Llad Phillips Output MC AVC AFC Output 13 Total Cost Variable Cost Fixed Cost Total Cost B Variable Cost A Fixed Cost per unit output Average Variable Cost AVC Marginal Cost MC Average Fixed Cost AFC Llad Phillips ATC MC Output AVC AFC Output 14 Average Total Cost per unit of output Cost per unit of output marginal cost per unit of output average variable cost per unit of output Market price Average total cost per unit of output A Output produced Llad Phillips Average total cost per unit of output output 15 Profit Margin Per unit of output Cost per unit of output marginal cost per unit of output average variable cost per unit of output Market price Average total cost per unit of output Profit margin A Output produced Llad Phillips Average total cost per unit of output output 16 Competitive Market Structure Firms are motivated by profits greed Profits equal revenue minus costs so firms are motivated to control costs efficiency In the long run profits are competed away by expansion of firms to the optimal size and by free entry of new firms capital attracted by the possibility of profits role of the stock market initial public offerings IPO s Each firm is only one of many and hence is a price taker not a price setter Thus each firm only adjusts output to maximize profit Llad Phillips 17 Behavior of the Firm Marginal cost curve is the supply curve of the firm because price equal to marginal cost maximizes profits Firm takes the market price sets this price equal to its marginal cost to determine how much to produce output decision If marginal cost equals average total cost at this output the firm breaks even If marginal cost exceeds average total cost at this output the firm makes a profit short run Llad Phillips 18 Policy Implications of Market Structure Llad Phillips 19 Market Power and Monopoly Compare and Contrast Competition and Monopoly Is monopoly a good thing or not How about Microsoft is this firm good or bad for consumers Llad Phillips 20 Market Power Market Structure No market power competition many producers firms are price takers no excess profit price to consumer long run average cost Market power monopoly one producer monopolist is price setter monopolist makes profits at expense of the consumer Llad Phillips 21 The Brief for Competition and against monopoly Llad Phillips 22 Competition …