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Econ 1900 Laura Lamb 1
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Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Dec 24, 2015

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Page 1: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Econ 1900 Laura Lamb

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Page 2: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

1. Perfect competition

2. Monopolistic competition

3. Oligopoly

4. Pure Monopoly

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Page 3: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

What are the major characteristics of each market model?

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Page 4: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Large number of firms

Standardized products

Price takers

Easy entry & exit of firms

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Page 5: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Then why do we study it?

◦ helps analyze industries with characteristics similar to perfect competition.

◦ provides a context in which to apply revenue and cost concepts developed in previous chapters.

◦ provides a norm or standard against which to compare and evaluate the efficiency of the real world.

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Page 6: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Demand is perfectly elastic for each firm◦ Not for the industry◦ Individual firms can sell as much as they want at

the market price

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Page 7: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Average Revenue

Total Revenue

Marginal Revenue

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Page 8: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Product price Quantity Demanded

Total Revenue Marginal Revenue

8888888

0123456

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Page 9: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

1. Compare total revenue & total cost

2. Compare marginal revenue & marginal cost

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Page 10: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Consider the Maple Syrup Market: The North American maple syrup market

produces nearly 30 million litres/year. More than 80% is produced in Canada. The number of firms can only be estimate because some are very small and sell their output in a small local market. There are about 9,500 producers in Canada & about 2,000 in the US.

  Maple syrup is not quite a standardized good,

but is close. At the wholesale level, the market is highly competitive and a good example for perfect competition.

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Page 11: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Total Revenue & Total Cost Schedule for Dave’s Maple Syrup

Quantity (cans/day)

Total Revenue ($/day)

Total cost ($/day)

Economic profit($/day)

01234567891011121314

081624324048566472808896

104112

15222730323334363944516076

104144

-15-14-11-607142025282928200

-3211

Page 12: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Where is the break-even point?

How do we describe the profit at this point?

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Page 13: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

MR = MC rule: in the short run, a firm will maximize profit by producing at the output level where MR = MC.

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Page 14: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Quantity (cans/day)

Total Revenue$/day

MR$/day

Total Cost$/day

MC$/day

Economic Profit

8

9

10

11

12

64

72

80

88

96

8

8

8

8

39

44

51

60

76

5

7

9

16

25

28

29

28

20

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Page 15: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

 

***The MR=MC rule is applicable to all market models***

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Page 16: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Note: for perfectly competitive firms: MR = MC is equivalent to P= MC

Why?

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Page 17: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

1. If average cost is $8/can, what is the economic profit?

2. Suppose the price dropped from $8/can to $6/can, how would the profit maximizing level of output change?

3. Now suppose, the price drops to $4/can. How much should Dave produce?

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Page 18: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Quantity (cans/day)

Total revenue

($/day)

MR ($/day) Total cost

($/day)

MC ($/day) Economic profit

(TR-TC)

7

8

9

10

11

12

28

32

35

40

44

48

4

4

4

4

4

36

39

44

51

60

76

3

5

7

9

16

-8

-7

-8

-11

-16

-28

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Page 19: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

If a loss is incurred, the firm should continue to produce as long as the price is greater than average variable cost (AVC).

Modified rule: MR = MC if P>minimum AVC

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Page 20: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

In the example of Dave’s Maple Syrup: when P=$8, quantity supplied = 10 when P=$4, quantity supplied = 8

◦ appears rational in light of the law of supply!

◦ The short-run supply curve is the section of the MC curve starting at minimum AVC (and above).

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Page 21: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

In what situations would the supply curve for the firm shift?

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Page 22: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Quantity supplied by 1 firm

Total quantity supplied by 1000 firms

Product price Total quantity demanded

10865

10,0008,0006,0005,000

8421

3,0005,0006,00010,000

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Page 23: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Is the industry profitable at the equilibrium?

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Page 24: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

1. The firm should produce is P≥minimum AVC

2. The firm should produce the quantity at MR=MC

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Page 25: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Individual firms must take price as given, but the supply plans of all competitive producers as a group are a major determinant of product price.

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Page 26: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Assumptions:1.Entry and exit of firms are the only long‑run

adjustments 2.Firms in the industry have identical cost

curves.3.The industry is a constant‑cost industry

the entry and exit of firms will not affect resource prices or location of unit‑cost schedules for individual firms.

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Page 27: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

**In the long run, product price = minimum ATC

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Page 28: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

If P>minimum ATC →economic profits will attract new firms to the industry →increased supply of the product →price is driven down to minimum ATC.

If P<minimum ATC →economic losses will cause some firms to leave the industry →decreased supply of the product →price is driven up to minimum ATC.

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Page 29: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

A change in consumer tastes increases the demand for product

trace the steps to a new long-run equilibrium

Illustrate with two graphs, one for the firm and one for the industry.

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Page 30: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Household income decreases causing a fall in demand for the product.

trace the steps to a new long-run equilibrium

Illustrate with two graphs, one for the firm and one for the industry.

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Page 31: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

**In the long run, equilibrium price & quantity always occur where ATC is at a minimum for a perfectly competitive firm.

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Page 32: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

The product price will be exactly equal to each firm’s point of minimum average total cost.

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Page 33: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Perfectly elastic ◦ Level of output does not affect price in the long-

run.

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Page 34: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Upward sloping as industry expands output.

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Page 35: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

Downward sloping as the industry expands output.

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Page 36: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

In the long run:◦ Productive efficiency occurs where P = minimum

ATC

◦ Allocative efficiency occurs where P = MC allocative efficiency implies maximum consumer and

producer surplus.

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Page 37: Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.

When a pharmaceutical company introduces a new drug, it typically owns the patent and can price and produce as a monopolist, earning economic profits.

When patent rights expire, firms pursuing economic profits enter the market for that drug.

Prices of these drugs typically drop 30-40 percent. ◦ Those lower prices increase efficiency and consumer

surplus.

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