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Lecture11 12 13 NK
Lecture11 12 13 NK
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December 1, 2019
3 Monopoly market
Monopolistic competition
Oligopoly
Definition of market
Market is a group of buyers and sellers of a particular good or
service
→ the firm takes the market price of the product as given, choosing its
output on the assumption that the price will be unaffected by the
output choice.
Microeconomics December 1, 2019 10 / 92
Profit maximization (Theory of profit - chapter
5)
Profit = Total Revenue - Total Cost
∆π
= ∆ TR/∆ Q − ∆ TC /∆ Q = (2)
∆Q ` ˛¸ x ` ˛¸
0 x
MR MC
How much output should a firm produce over the short run, when
its plant size is fixed (capital = constant, labour is changeable)?
A firm can use information about revenue and cost to make
a profit-maximizing output decision.
MC > MR
MR >MC
MR = P
profit
Output Rule:
If a firm is producing any output, it should produce at the level at
which marginal revenue equals marginal cost.
A supply curve for a firm tells us how much output it will produce at
every possible price
Competitive firms will increase output to the point: P = MC
→ The firm’s supply curve is the portion of the MC curve for which MC
>
AVC.
SR profit =ABCD
LR profit =0
In the short-run:
Profit is the area ABCD
In the long-run:
The firm maximizes its profit by choosing the output at which price
equals long-run marginal cost LMC.
The firm increases its profit from ABCD to EFGD by increasing its
output in the long run.
Economic profit
π = TR − (wL + rK (3)
`
)
x = ˛T ¸ C
2.No firm has an incentive either to enter or exit the industry because all
firms are earning zero economic profit.
3.The price of the product is such that the quantity supplied by the
industry is equal to the quantity demanded by consumers.
In (a) we see that firms earn positive profits because long-run average
cost reaches a minimum of $30 (at q2).
The term “increasing cost” refers to the upward shift in the firms’ long-
run average cost curves, not to the positive slope of the cost curve itself.
The industry supply curve can be downward sloping. In this case, the
unexpected increase in demand causes industry output to expand as
before. But as the industry grows larger, it can take advantage of its
size to obtain some of its inputs more cheaply.
Consumer surplus
is the area above the market price and up to the demand curve; this is the
total benefit or value that consumers receive beyond what they pay for the
good.
Producer surplus
is the area above the supply curve up to the market price; this is
the benefit that lower-cost producers enjoy by selling at the market
price.
Market price
(A − B) + (− A − C ) = − B − (4)
C
b.In the long run, how many units will this firm produce and what price
will it sell each unit for in this market?
1 What is monopoly?
2 Sources of monopoly
3 power
4 Demand and marginal revenue for a monopolist?
5 Monopolist’s output decision (price, quantity and
6 profit) Is there any supply curve for a monopolist?
7 Measuring market power
Price discrimination
A monopoly
is a market that has only one seller but many buyers.
Market power
is an ability of a seller or buyer to affect the price of a
good.
2
TR = Q.P = aQ − bQ (8)
AR = TR/Q = a − bQ (9)
∆π
= ∆ TR/∆ Q − ∆ TC /∆ Q = (11)
∆Q
0
Q* maximizes profit
is the output level at which MR = MC.
∆ TR
MR = = (12)
∆(
∆Q PQ)
∆Q
1 Producing 1 extra unit and selling it at price P yields revenue = P.
2 But because the firm faces a downward-sloping demand curve,
producing and selling this extra unit also results in a small drop in
price ∆P/∆Q which reduces the revenue from all units sold (i.e.,
a change in revenue Q ∗ ⟨∆P/∆Q⟩).
3 Thus:
∆P
(13)
P
∆P
Microeconomics December 1, 2019 54 / 92
Pricing in Monopoly
P
MR = P + P ⟨∆ P⟩ (14)
` Q˛ ¸
1 /E d
⟨ ⟩
∆Q x
1
MR = P + P = (15)
MC Ed
P − MC 1
=− (16)
P Ed
In (a), the demand curve D1 shifts to new demand curve D2. But the
new marginal revenue curve MR2 intersects marginal cost at the same
point as the old marginal revenue curve MR1. The profit-maximizing
output therefore remains the same, although price falls from P1 to P2.
In (b), the new marginal revenue curve MR2 intersects marginal cost at a
higher output level Q2. But because demand is now more elastic, price
remains the same.
Monopoly power
is the ability to set price above marginal cost and that the amount by
which price exceeds marginal cost depends inversely on the elasticity
of demand facing the firm.
The less elastic the demand curve is, the more monopoly power a firm
has.
The ultimate determinant of monopoly power is therefore the
firm’s elasticity of demand.
L = (P − MC )/P = (18)
− 1/Ed
The Lerner index always has a value between zero and one. For a
perfectly competitive firm, P = MC, so that L = 0. The larger is L, the
greater is the degree of monopoly power.
Microeconomics December 1, 2019 60 / 92
Price markup
(The next slide) If the firm’s demand is elastic, as in (a), the markup
is small and the firm has little monopoly power. The opposite is true
if demand is relatively inelastic, as in (b).
Figure (a) shows a monopolist that charges the same price to all
customers. Total surplus in this market equals the sum of profit
(producer surplus) and consumer surplus.
Despite knowing that oil waste had been dumped at the source, the
supplier – Vinaconex Water Supply Joint Stock Company (Viwasupco)
– continued to pump water into family homes. At a press conference,
the company’s CEO even said: “Viwasupco was the biggest victim in
this case.”
The case has raised questions about who is responsible for checking
water quality and ensuring it is safe for use, and whether the
participation of the private sector in delivering public goods is as
necessary and efficient as expected.
1 Many sellers: There are many firms competing for the same group
of customers.
2 Product differentiation: Each firm produces a product that is at least
slightly different from those of other firms. Thus, rather than being a
price taker, each firm faces a downward-sloping demand curve.
3 Free entry and exit: Firms can enter or exit the market without
restriction. Thus, the number of firms in the market adjusts
until economic profits are driven to zero.
4 It is a hybrid of monopoly and
competition.
Similarly, if firms are making losses, old firms exit, and the demand
curves of the remaining firms shift to the right. Because of these shifts
in demand, a monopolistically competitive firm eventually finds itself in
the longrun equilibrium shown here.
In this long-run equilibrium: P = ATC and the firm earns zero profit.
Two differences:
1 The perfectly competitive firm produces at the efficient scale,
where average total cost is minimized. By contrast, the
monopolistically competitive firm produces at less than the
2 efficient scale.marginal cost under perfect competition, but price
Price equals
is above marginal cost under monopolistic competition.
Oligopoly:
A market structure in which only a few sellers offer similar or
identical products
Strategy
Because oligopolistic markets have only a small number of firms, each
firm must act strategically. Each firm knows that its profit depends not
only on how much it produces but also on how much the other firms
produce. In making its production decision, each firm in an oligopoly
should consider how its decision might affect the production decisions of
all the other firms.
Game theory
the study of how people behave in strategic situations.
Microeconomics December 1, 2019 89 / 92
Competition, Monopolies, and Cartels
Collusion
An agreement among firms in a market about quantities to produce
or prices to charge.
Cartel
A group of firms acting in unison.
Example: OPEC. What is OPEC? Please try to look in
youtube. Website of OPEC: https://www.opec.org/opecw
eb/en/
Nash equilibrium:
a situation in which economic actors interacting with one another each
choose their best strategy given the strategies that all the other actors
have chosen