PB102 MICROECONOMICS

PB102 MICROECONOMICS

PB102 MICROECONOMICSCHAPTER 7MARKET STRUCTURE EQUILIBRIUMWhat is Market Equilibrium?A firm is in equilibrium when it earns maximum profit or when minimum losses occurMARKET STRUCTURE EQUILIBRIUMSHORT RUN EQUILIBRIUMTotal ApproachMarginal ApproachSHUT DOWN POINTLONG RUN EQUILIBRIUMShort-run EquilibriumShort run means a period in which at least one of the input is fixedIs about how the industry or firms maximize their profitsHas two approaches to determine profit maximizationTotal ApproachMarginal ApproachPerfect CompetitionQuantityTotal RevenueTotal CostProfit/Loss0060-601100140-402200210-10330029010440039010550050006600630-307700800-100Perfect CompetitionTotal ApproachTRTCPerfect CompetitionQTRMRTCMCProfit/Loss00-60--60110010014080-40220010021070-1033001002908010440010039010010550010050011006600100630130-307700100800170-100Perfect CompetitionMarginal ApproachMRMC4100Short run equilibrium In the short run, perfect competition firm will enjoy THREE types of profit:Supernormal profit Profit earned when total revenue greater than total cost TR > TC or P > ATCSubnormal profitEconomic losses because total revenue less than total cost or price is lower than average total costTR < TC or P < ATCNormal profitIs a breakeven for the firm to stay in industryIncurred when total revenue equal is to total cost TR = TCSupernormal Profit

Subnormal Profit PATCMCMRNormal Profit

Long-run EquilibriumIn the long run, firms has enough time to make changes and adjustments to production processAll inputs are variable in the long runPerfect competition only earn economic profit/normal profit in the long run due to of free entry and exit in industryLong run Equilibrium

Shut Down PointIf the price is below than average total cost (AVC), firms have TWO possibilities either:Continue the operation;Shut down the operationP < AVC

Shut Down Point

Short Run EquilibriumIn monopoly, the short run equilibrium can also be determined by two approaches:Total ApproachMarginal Approach18Exhibit 5: Short-Run Revenues and Costs for the Monopolist Price Marginal Marginal Average TotalDiamonds(average Total Revenue Total Cost Total Cost Profit or per day revenue) revenue (MR = Cost ( MC = (ACT = Loss = (Q) (p)(TR = Q x p) TR / Q) (TC) TC / Q) TC/Q) TR - TC (1) (2)(3) =(1) x (2) (4) (5) (6) (7) (8) 0$7,750 0 - $15,000 - - -$15,000 1 7,500 $7,500 $7,500 19,750 4,750 $19,750 -12,250 2 7,25014,5007,00023,5003,750 11,750 9,000 3 7,00021,0006,50026,5003,0008,830 -5,500 4 6,75027,0006,00029,0002,5007,750 -2,000 5 6,50032,5005,50031,0002,0006,200 1,500 6 6,25037,5005,00032,5001,5005,420 5,000 7 6,00042,0004,50033,7501,2504,820 8,250 8 5,75046,0004,00035,2501,5004,41010,750 9 5,50049,5003,50037,2502,0004,14012,25010 5,25052,5003,00040,0002,7504,00012,50011 5,00055,0002,50043,2503,2503,93011,75012 4,75057,0002,00048,0004,7504,000 9,00013 4,50058,5001,50054,5006,5004,190 4,00014 4,25059,5001,00064,0009,5004,570 -4,500 15 4,00060,000 50077,500 13,5005,170 -7,50016 3,75060,000 096,000 18,5006,000 -36,00017 3,500 59,500 -500 121,000 25,0007,120 -61,500Short-run Costs and Revenue for a Monopolist

20Exhibit 6: Monopoly Costs and Revenue0MRMarginal costD = Average revenue Average total cost$5,2504,000ProfitabeDiamonds per day101632(a) Per-Unit Cost and Revenue$52,500 40,000 15,000 0 10 16 32Total revenueTotal costMaximum profitDiamonds per day(b) Total Cost and RevenueThe intersection of the two marginal curves at point e in panel (a) indicates that profit is maximized when 10 diamonds are sold. At this rate of output, we move up to the demand curve to find the profit-maximizing price of $5,250. The average total cost of $4,000 is identified by point b the average profit per diamond equals the price of $5,250 minus the average total cost of $4,000 $1,250 economic profit is the equal to $1,250 * 10 units sold $12,500 as shown by the blue shaded area.In panel (b), the firms profit or loss is measured by the vertical distance between the total revenue and total cost curves again profit is maximized where De Beers produces 10 diamonds per dayDollars per unitTotal dollars20Monopolists ProfitIn short run, monopolist earn THREE types of profit, same as perfect competitionSupernormal profitTR > TC or P > ATCSubnormal profitTR < TC or P < ATCNormal profit/ Breakeven profitTR = TCSupernormal Profit

Subnormal Profit

Normal profit

Long Run EquilibriumIn the long run, monopolist will only earn supernormal profitsThis is because there are barriers to entry of new firms into the marketLong Run Profit

Monopolistic Short run EquilibriumLong run EquilibriumShort Run EquilibriumIn the short run equilibrium, monopolist firms earn THREE types of profitSupernormal profitTR > TC or P > ATCSubnormal profitTR < TC or P < ATCNormal profitTR = TC

Supernormal Profit

Subnormal Profit

Normal Profit

Long Run EquilibriumIn the long run, a monopolistic competitive firm will earn normal profitLong Run Equilibrium