Basic Terms Revenue = income from sales ($ in) Cost = an expense ($ out) Profit = Revenue – Cost Marginal = Additional from One Unit.

Basic Terms

• Revenue = income from sales ($ in)

• Cost = an expense ($ out)

• Profit = Revenue – Cost

• Marginal = Additional from One Unit

Perfect Competition Long Run Economic Profit = Zero• Accounting Profit=

Total Revenue -Total Explicit Costs

Explicit Costs= direct payments made to others

examples= rent, utilities, wages, materials

Long Run Economic Profit = Zero

• Economic Profit= Total Revenue -Total Explicit/Implicit Costs

Implicit Costs= opportunity cost/ “profit” required to keep entrepreneur from “exiting” the market

examples= using land and equipment to grow wheat instead of corn

Long Run Economic Profit = Zero

• Economic Profit > Zero– Firms will “enter” the market in the long run

• Economic Profit < Zero– Firms will “exit” the market in the long run

Long Run Economic Profit = Zero

• Economic Profit = 0– called “normal profit”

Perfect Competition

• Profit Maximization- MR=MC

• Long-Run Economic Profit = ZERO

Perfect Competition

• Decisions– Quantity

Monopolistic Competition v. Oligopoly

Considerations:

# of Firms

Market Dominance

Geographic Area

Barriers to Entry

Monopolistic Competition v. Oligopoly

Do the decisions of one firm greatly affect the others firms in the market?

Do the decisions of one firm have little/no impact on the market?

Monopolistic Competition v. Oligopoly

A Dividing Line

4 Largest Firms control over 40% of the market

Barriers to Entry

Think!

DeBeers

Walmart

Coca-Cola

Keurig K-Cups

Liquor Store (in PA)

Continental Airlines

• Capital Cost

• Customer Loyalty

• Control of Resources

• Economies of Scale

• Legal– Patents, copyrights– Government regulation, licensing

Barriers to Entry

Barriers to Entry

Think!

DeBeers

Walmart

Coca-Cola

Keurig K-Cups

Waste Management

Continental Airlines

• Capital Cost

• Customer Loyalty

• Control of Resources

• Economies of Scale

• Legal– Patents, copyrights– Government regulation, licensing

Barriers to Entry

• Algeria • Angola • Ecuador • Iran • Iraq • Kuwait • Libya • Nigeria • Qatar • Saudi Arabia • United Arab Emirates • Venezuela

OPEC

Oligopoly Terms

• Duopoly

• Collude/Collusion

• Cartel

Organization of Petroleum Exporting Countries

FTC

Denied

Horizontal Merger

• Two companies in same industry

Vertical Merger

• Two companies in complimentary industries

Potential Competition Merger

Antitrust Laws• Sherman Antitrust Act (1890)

– Banned predatory and unfair business practices

• Clayton Antitrust Act (1914)– Specified unfair practices

• Interlocking Directories• Price Discrimination• Exclusive Dealings and Tying• Mergers to Destroy Competition

• Federal Trade Commission (FTC)– Approves mergers and enforces trade regulations

Market Structures

• Perfect Competition

• Monopolistic Competition

• Oligopoly

• Monopoly