ANNOUNCEMENT:

SCHEDULE OF EXAMS (Tentative):

o TEST #1 DONE!

oTEST #2 Jan. 28, 2011 (Friday).

o TEST #3 February, 2011 (TBA).

o FINAL EXAM Announced during FINAL EXAM WEEK

1/14/2011 Econ. 11 - Lecture #15 1

Lecture 15: MONOPOLY AND IMPERFECT COMPETITION

Review: COST & SUPPLY in Competition

Industry cost curves decreasing, constant, and increasing Different market structures Introduction to monopoly and imperfect competition

Price

IN PURE COMPETITION, THE FIRM TAKES THE PRICE DETERMINED IN THE MARKET. The Average Revenue (AR) does not change because the Price is the same at any level of output. The Marginal Revenue is also equal to the Price.

P0

P=AR=MR= Demand

Quantity

MC, AC P0

GIVEN MARKET PRICE AT P0 MC P=MR= Demand PROFIT AC

AC0

COST (=AC x Q0)

0
1/14/2011

11 - Lecture #15 q THE FIRMEcon. PRODUCES 0

q0

Quantity 4

MC, AC P0

GIVEN MARKET PRICE AT P0 Potential for more profits MC P=MR= Demand PROFIT AC

AC0

COST

0
1/14/2011

If output is q-10,Econ. PROFIT 11 - Lecture #15 IS SMALLER. MC < MR.

q-10

q0

Quantity 5

MC, AC P0

GIVEN MARKET PRICE AT P0 Additional Loss PROFIT MC P=MR= Demand AC

AC0

COST

Producing 1/14/2011

at q+10 meansEcon. that if Price is at P0, 11 - Lecture #15 additional loss is incurred; MC>MR.

q0

q+10 Quantity
6

P, MC, AC, AVC P4 P3 P2

MC IS THE SUPPLY SCHEDULE! REVISED RULE: P=MR=MC MC

AC

AVC Break-even point

P1 Shut-down point 0

q1

q2 q3

q4

Quantity 7

FIRM IN PURE COMPETITION: THE DEMAND SCHEDULE FOR THE FIRM: ALL OUTPUT CAN BE SOLD AT THE INDUSTRY PRICE
oThis means the Price = Average Revenue = Marginal Revenue.

THE SUPPLY SCHEDULE: MC SCHEDULE (from shutdown point). FIRM IN EQUILIBRIUM: Demand is equal to Supply: oP (or P=AR=MR) = MC.

LONG-RUN COST AND SUPPLY

A sampling all competing firms in the market 1/14/2011 graph of the cost curves Econ. 11 of - Lecture #15 10

The1/14/2011 firms with equal average costs exhaust their optimum production first. Econ. 11 - Lecture #15 11

When costs begin to rise and there is additional demand, then the high 1/14/2011 11 - Lecture #15 12 cost firms enter the market.Econ. Hence, the industry is a rising cost industry.

INDUSTRY COST CURVES

Long run cost curves indicate whether an industry becomes competitive or monopolistic (=one or few firms). Examples of constant and increasing cost industry leading to competitive outcome. Case of a very large investment. Case of the decreasing cost industry leading to monopoly (=one firm) or oligopoly (=a few firms).
1/14/2011 Econ. 11 - Lecture #15 13

When costs begin to rise and there is additional demand, then the high 1/14/2011 11 - Lecture #15 14 cost firms enter the market.Econ. Hence, the industry is a rising cost industry.

Cost

CONSTANT COST

AC

DECREASING COST 0

INCREASING COST Very Large Quantity

1/14/2011

COST CURVE OF A VERY LARGE SINGLE Econ. 11 - Lecture #15 INVESTMENT

15

Cost

In the case of a decreasing cost industry, the firm that is ahead will always have a lower average cost and therefore will dominate the market.

ac1 ac2 Average cost

Q1

Q2

Quantity

A decreasing cost long run industry leads to monopoly (one producer) or oligopoly (a few producers).
16

Monopoly and Imperfect Competition (one or relatively few firms in the industry)

Industry and the firm: note that the firm is very small relative to the industry equilibrium.
18

Average cost
Firm size is very small pure competit ion. Firm size is somewhat large but faces many competitor s with the same cost curves.

Industry demand
Firm size is very large and faces only very few competitors. .

Firm size meets all market needs.

Quantity
19

Size of firm in relation to Econ. the 11 industry demand 1/14/2011 - Lecture #15 and market structures

Price

Firm size is very small relative to the total industry demand

Firm supply
MC

Industry demand

Industry supply

P0

AC

q0
1/14/2011

Q0 Case of pureEcon. or 11 perfect competition - Lecture #15 QUANTITY

20

Firm size is large relative to market demand but it has many

Price competitors. Each firm can influence market outcome through

efforts to distinguish (differentiate) the product from those of competitors.

Industry demand
MC AC

0 QUANTITY
1/14/2011 Econ. 11 - Lecture #15 21

Case of monopolistic or imperfect competition

Price

Firm size is very large relative to market demand but the market has room for a few competitors. Each firm can influence market outcome. Firm is sizable in relation to the industry .

Industry demand
MC AC

0
1/14/2011

Case of oligopolistic competition Econ. 11 - Lecture #15

QUANTITY
22

Price

Firm size very large in relation to the market. Entry of competition is effectively blocked by declining cost curves (natural monopoly) or by regulation. Industry demand
MC AC

0 Case of monopoly QUANTITY

23

Average cost
Firm size is very small pure competit ion. Firm size is somewhat large but faces many competitors with the same cost curves.
M O CO NO M PO PE L TI IST TI I ON C

Industry demand
Firm size is very large but the firm faces a few competitors.

Firm size meets all market needs.

CO P M UR PE E TI TI ON

O OP IG OL

LY

LY PO NO MO

Quantity
24

Size of firm in relation to Econ. the 11 industry demand 1/14/2011 - Lecture #15 and market structures

See Table 9-2.

Summary: Types of Market Structure

Summary: Number of Firms (Number of Sellers)

Pure Competition Infinite number of sellers Monopolistic or Differentiated Competition Many sellers Oligopoly Few sellers Monopoly Only one seller
26

Summary: Prevalence in the economy

Pure Competition Very common products in the farm, in auction markets, in basic commodities Monopolistic or Differentiated Competition Very common: Products are branded, Service is often differentiated Oligopoly -- Common Monopoly -- Common
1/14/2011 Econ. 11 - Lecture #15 27

Summary: Examples
Pure Competition Basic commodities (staple foods), public markets, auction markets Monopolistic or Differentiated Competition Restaurants, Food markets, Department store goods, Branded consumer items (detergents, soap, toothpaste), Personal Care products (medicines) Oligopoly Coke vs Pepsi, Big Marketing Groups, Conglomerates, McDo vs Jollibee, Smart vs Globe vs Sun, Car manufacturers, San Miguel beer Monopoly The only store in a town; Meralco in MetroManila; ice plant; public utility; etc.
1/14/2011 Econ. 11 - Lecture #15 28

Analysis of monopoly equilibrium How a monopoly maximizes profit

Table 9-1. MONOPOLY REVENUE & COST

Q (1) 0 1 2 3 4 5 6
7

P (2) 40 36 32 28 24 20 16
12

TR (3) 0 36 64 84 96 100 96
84

TC (4) 29 35 40 44 50 60 74
92

Profit (5)

MR (6)

MC (7)

MR-MC (8)

8
1/14/2011

64

114
Econ. 11 - Lecture #15 30

10

Table 9-1. MONOPOLY REVENUE & COST

Q (1) 0 1 2 3 4 5 6
7

P (2) 40 36 32 28 24 20 16
12

TR (3) 0 36 64 84 96 100 96
84

TC (4) 29 35 40 44 50 60 74
92

Profit (5) -29 1 24 40 46 40 22

-8

8
1/14/2011

64

114

-50
31

Profit = TR TC = Total Revenue Econ. 11 - Lecture #15minus Total Cost

Table 9-1. MONOPOLY REVENUE & COST

Q (1) 0 1 2 3 4 5 6
7

P (2) 40 36 32 28 24 20 16
12

TR (3) 0 36 64 84 96 100 96
84

TC (4) 29 35 40 44 50 60 74
92

Profit (5) -29 1 24 40 46 40 22

-8

MR (6) 36 28 20 12 4 4
-12

MC (7) 6 5 4 6 10 16
18

64

114

-50

-20

22
32

Table 9-1. MONOPOLY REVENUE & COST

Q (1) 0 1 2 3 4 5 6
7

P (2) 40 36 32 28 24 20 16
12

TR (3) 0 36 64 84 96 100 96
84

TC (4) 29 35 40 44 50 60 74
92

TR-TC (5) -29 1 24 40 46 40 22

-8

MR (6) 36 28 20 12 4 4
-12

MC (7) 6 5 4 6 10 6
8

MR-MC (8) MR>MC MR>MC MR>MC MR>MC MR<MC MR<MC

MR<MC

64

114

-50

-20

22

MR<MC
33

11

Table 9-1. MONOPOLY REVENUE & COST

Q (1) 0 1 2 3 4 5 6
7

P (2) 40 36 32 28 24 20 16
12

TR (3) 0 36 64 84 96 100 96
84

TC (4) 29 35 40 44 50 60 74
92

TR-TC (5) -29 1 24 40 46 40 22

-8

MR (6) 36 28 20 12 4 4
-12

MC (7) 6 5 4 6 10 6
8

MR-MC (8) MR>MC MR>MC MR>MC MR>MC MR<MC MR<MC

MR<MC

64

114

-50

-20

22

MR<MC
34

AT SOME POINT MR=MC, or PROFIT IS HIGHEST!

TR, TC, Total Profit

Q TR (1) (3) 0 1 2 3 4 5 6
7

TC (4) 29 35 40 44 50 60 74
92

TC Slope of TR (=MR) is equal to the slope of TC (=MC).

0 36 64 84 96 100 96
84

TR

64

114

Highest Profit Level

Quantity 35

TR, TC, Total Profit

Q Profit (1) (5) 0 1 2 3 4 5 6
7

100

TC

-29 1 24 40 46 40 22
-8

50 TR

-50

Total Profit 0 4 Quantity 36

Another view: HIGHEST PROFIT LEVEL

12

TR, TC, Total Profit 100 TC

Maximum Profit 50 Slope of total profit schedule is zero at same quantity where MR=MC. 0 4
Total cost graphed against total revenue

TR

Quantity 37

To analyze monopoly equilibrium, it is convenient to graph the relationships among: MR, MC, AC, & AR (Demand schedule).
1/14/2011 Econ. 11 - Lecture #15 38

AR, MC, AC
Q TC MC (1) (4) (7) 0 1 2 3 4 5 6
7

29 35 40 44 50 60 74
92

6 5 4 6 10 16
18

MC

AC AC=TC/Q

114

22

Cost curves of the Firm

Quantity 39

13

AR, MC, AC
Q TR (1) (3) 0 1 2 3 4 5 6
7

MR (6) 36 28 20 12 4 4
-12

0 36 64 84 96 100 96
84

MC

AC

AR(=TR/Q) MR 0
Average revenue (=TR/Q) with MR, MC and AC.

64

-20

Quantity 40

Monopoly equilibrium

MR, MC, AR, AC

Q MR MC (1) (6) (7) 0 1 2 3 4 5 6
7

36 28 20 12 4 4
-12

6 5 4 6 10 16
18

MC

AC PROFIT COST MR 0 4.2 4 Quantity 42 AR

-20

22

Average revenue (=TR/Q) with MR, MC and AC.

14

End of todays lecture. Good day! Lecture 15

1/14/2011 Econ. 11 - Lecture #15 43

15