4 TYPES OF MARKET STRUCTURES

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

How does a purely competitive seller sets the price?

- The same way as other firms set

What is the Profit Maximizing output role under Perfect competition?

- Price = Marginal Cost

What is the competitive output role under Monopoly?

- Marginal Revenue = Marginal Cost (MR = MC)

What is the competitive output role under Monopolistic Competition?

- Marginal Revenue = Marginal Cost (MR = MC)

Same ba ng output role ang Monopoly at Monopolistic Competition?

- Same output role and same structure, different products offered in the market

When can we say that a purely competitive seller earns at a loss?

- Average Total Cost / Cost is higher than the Price

In this situation (loss), should the firm continue operating in the short run?

- They should still continue if they are covering their fixed cost.
- Also, since the Price is still higher that the Average Variable Cost.

When is the right time to shut down the plant to minimize losses in the short run?

- If the Average Variable Cost is higher than the Price.

What is the market power of Meralco (monopoly)?

- They have more power such as setting higher prices but they don’t have unlimited market
power because there is ‘deadweight loss of monopoly’ (inefficiency: produce less and
charge more) therefore, in order to solve this, the government can intervene.
- Monopolist’s power is constrained by the demand curve. (higher demand, lower price;
lower demand, higher price)

In relation to economies of scope, what is commissary?

- In the monopolistic competition, McDo and Jollibee, almost all of the products offered in
this 2 outlets are not produce in their respective outlets, pinoproduce siya under respective
COMMISSARIES.
- Place where all products of a particular fast food chain are produce in order to economize.

How patents and other legal barriers do generates as a market power in a monopoly?

- It is the exclusive right of the industry to produce the product, no one can copy it.

Is there an expiration date for patents?

 - Yes. It needs to be renewed.

Bakit may supply curve ang Perfect Competition pero ang Monopoly wala?

- PC: P = MC kaya may supply curve

- Monopoly: PC > MR=MC

- M for our firm

- C for Competitor’s

SOLUTIONS

*derivative dapat ng cost function yung marginal cost

 CAPITAL LABOR
MEASURES OF PRODUCTIVITY
AVERAGE PRODUCT OF

MARGINAL PRODUCT OF

PROFIT-MAXIMIZATION INPUT USAGE

TO MAXIMIZE PROFITS
WHEN LABOR OR CAPITAL
VARY IN THE SHORT RUN,
THE MANAGER WILL HIRE:

ALGEBRAIC FORMS OF PRODUCTION FUNCTIONS

LINEAR

AVERAGE PRODUCTS OF

MARGINAL PRODUCTS OF

LEONTIEF

COBB-DOUGLAS

AVERAGE PRODUCTS OF

MARGINAL PRODUCTS OF

MARGINAL RATE OF TECHNICAL SUBSTITUTION

ABSOLUTE VALUE OF THE SLOPE OF THE ISOQUANT
HIGHER = MORE
LOWER = LESS

THE COST FUNCTION

FIXED COST VARIABLE COST TOTAL COST
AVERAGE COSTS
MARGINAL COST

CUBIC COST FUNCTION

MARGINAL COST
FUNCTION

PERFECT COMPETITION
COST, REVENUES, AND PROFITS UNDER MONOPOLY
R = P*Q Revenue = Price * Unit of Output
Slope of R = MR = P = Df = Slope of Revenue = Marginal Revenue = Price = Demand
Pe Curve = Price Equilibrium
Slope of C (Q) = MC Slope of Cost = Marginal Cost
PROFIT MAXIMIZATION
Profits = ATC(Q) – Pe Profits = Average Total Cost – Price
Profit = P*Q – C(Q) Profits = Price * Quantity – (Cost Function)
COMPETITIVE OUTPUT RULE
P = MC (Q) = C (Q) Price = Marginal Cost (increasing marginal cost) = Cost
Function / Slope of Cost
SHORT RUN OUTPUT DECISION
CONTINUE if P ≥ AVC Continue if Price is above Average Variable Cost
CLOSE if P < AVC Close if Price is below Average Variable Cost
SHORT RUN SUPPLY CURVE
Short Run Supply Curve = Short Run Supply Curve = Marginal Cost above Average
MC above AVC Variable Cost
LONG RUN COMPETITIVE EQUILIBRIUM DECISION
P = MC Price (Value to Society) = Marginal Cost (Cost to Society)
P = min AC Price = Minimum of Average Cost
PRICING RULE
P = P of other firms Price = Price of other firms
ADDTL NOTES
Economic Profit = 0 If EP>0 then there’s Entry, until Df is tangent to AC curve
If EP<0 then there’s Exit, until Df is tangent to AC curve
MONOPOLY
SOURCES OF MONOPOLY POWER
Economies of Scale vAC Decline of Long Run Average Costs, Increase of Output
^Q
Diseconomies of Scale ^Q Increase of Long Run Average Costs, Increase of Output
vAC
Economies of Scope 2TC > Total Cost of producing 2 products > Cost of producing 2
1C + 1C separate products
Cost Complementarity ^ Marginal Cost of Output A is reduced when Marginal
MC of B, v MC of A Cost of Output B is increased.
MARGINAL REVENUE AND ELASTICITY / PROFIT MAXIMIZING OUTPUT
Marginal Revenue MR- Marginal Revenue
Function P- Price Charge
MR = P 𝐸
1+𝐸 E- Elasticity of Demand for the Monopolist’s Product

For P > 0 MR > 0 when E < -1 ELASTIC

MR = 0 when E = -1 UNITARY
MR < 0 when -1 < E < 0 INELASTIC
Inverse Demand Function Price = a +b (output)
P(Q) = a + b Q a > 0 and b < 0
MR (Q) = a + 2bQ Marginal Revenue = a + 2b (output)
OUTPUT RULE
MR (QM) = MC (QM) Profit Maximizing Output:
 Marginal Revenue = Marginal Cost
[P > MR/MC]
PROFIT MAXIMIZATION
Profits = PM - ATC (QM)) x Profits = (Price – Average Total Cost) x Output
QM Profits = (Price x Output) – Cost
PRICING RULE
PM = P(QM) Price = Price x Output
MULTIPLANT DECISIONS
P(Q) where Q = Q1+Q2 The per-unit price consumers are willing to pay for the
total output produced at the two plants is Price *
Quantity
Where Q = Q1+Q2
PROFIT MAXIMIZING Marginal Revenue = Marginal Cost for Plant 1
RULE: Marginal Revenue = Marginal Cost for Plant 2
MR(Q) = MC1(Q1)
MR(Q) = MC2(Q2)
A MONOPOLIST EARNING ZERO PROFITS
M M
P = ATC (Q ) Optimal Price exactly equals the Average Total Cost of
Production
ADDTL NOTES
Economic Profit = Positive However, it does not guarantee positive profits
MONOPOLISTIC COMPETITION
PROFIT MAXIMIZATION
MC = MR Marginal Revenue = Marginal Cost
Q*: MR(Q*) = MC(Q*) Marginal Revenue*Output = Marginal Cost*Output
P* = P(Q*) Price = Price * Output
LONG-RUN
P > MC Price > Marginal Cost
P = ATC > minimum of Price equals Average Total Cost that is greater than the
average costs minimum average cost
OPTIMAL ADVERTISING DECISIONS
𝐴
=
𝐸 𝑄,𝐴 A- Advertising
𝑅 − 𝐸 𝑄,𝑃

R- Revenue / Sales (Price*Output)

E- E Own Price Elasticity of Demand
ADDTL NOTES
Economic Profit = 0 No economic profit in the long run