Chapter 18 - Competition and monopoly. After completing this unit, you should be able to: Understand how firms determine the optimal level of output, demonstrate the differences in output choices between firms in perfect competition and monopoly, compare profits for perfectly competitive firms and monopolies,…
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter 18 Competition and Monopoly Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: Daniel Acker/Bloomberg via GettyImages, Inc PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Ø Ø Understand how firms determine the optimal level of output Demonstrate the differences in output choices between firms in perfect competition and monopoly Ø Ø Assess the economic efficiency of firms in perfect competition versus monopolies Understand why some economists argue for regulation of monopoly power Compare profits for perfectly competitive firms and monopolies Copyright © 2013 John Wiley & Sons, Inc Profits and COSTS Copyright © 2013 John Wiley Costs of production Copyright © 2013 John Wiley Output and Revenue Copyright © 2013 John Wiley Output and Revenue Copyright © 2013 John Wiley THE PROFIT-MAXIMIZING OUTPUT LEVEL Ø Ø Ø The Profit-maximizing Output Level for a firm occurs where MR = MC If MR > MC , increasing output will increase profits If MR < MC , decreasing output will increase profits Copyright © 2013 John Wiley THE PROFIT-MAXIMIZING OUTPUT LEVEL Copyright © 2013 John Wiley THE PROFIT-MAXIMIZING OUTPUT LEVEL Copyright © 2013 John Wiley PERFECT COMPETITION Ø Perfect Competition is a market characterized by many firms producing identical products for a large number of buyers Buyers and sellers have complete information about prices, and firms can easily enter or exit the market Ø Identical products Ø Complete information Ø Many buyers and sellers Ø Easy entry and exit Copyright © 2013 John Wiley 10 Price taker and Marginal revenue Ø Ø Price Taker are firms that cannot set the price of their good, but instead must take the market price as given A perfectly competitive firm: Ø is a price taker Ø sells all its products at the same price Ø MR = P Copyright © 2013 John Wiley 11 perfect competition market and firm Copyright © 2013 John Wiley 12 Normal profit and economic profit Ø Ø Ø Normal Profit is the profit that business owners could earn if they applied their resources and skills in their next best business alternative Normal profit is total revenue minus total cost, including opportunity cost Economic Profit occurs when a firm earns more than $0 in normal profits A firm owner earning economic profit earns more than she would if she chose her next best alternative 13 Copyright © 2013 John Wiley Ø Monopoly Ø Ø Ø Ø A Monopoly is a market with only one seller of a good or service In the early 1900s, De Beers controlled 90 percent of the world ’s diamond mines and production Monopolies arise because barriers to entry Barriers to Entry are obstructions that make it difficult for new firms to enter a market Copyright © 2013 John Wiley 14 Price setters Ø Ø A monopolist is a price setter Price Setters are firms that are able to set the prices for their products Copyright © 2013 John Wiley 15 Market Demand and Marginal Revenue under Monopoly Copyright © 2013 John Wiley 16 Demand and Marginal Revenue under Monopoly Copyright © 2013 John Wiley 17 Profit-Maximizing Output for Monopoly Firms Copyright © 2013 John Wiley 18 Comparing Perfect Competition and Monopoly Copyright © 2013 John Wiley 19 Perfect Competition, Monopoly, and Efficiency Ø Resource allocative efficiency results from the situation where MB = MC for the society Ø Under Perfect Competition MB = P = MR = MC Efficient Ø Under Monopoly MB = P > MR = MC Inefficient At the level of output Q*(m), MB = P > MC implies 20 room Copyright © 2013 John Wiley for improving efficiency MONOPOLY REGULATION Ø Antitrust Laws are laws that promote competition between businesses and prohibit anticompetitive behavior by firms with large control over markets Ø Sherman Anti-Trust Act Ø Clayton Anti-Trust Act Ø The Federal Trade Commission Copyright © 2013 John Wiley 21 Questions/Discussions Why is the price for a perfectly competitive firm equal to marginal revenue but the price for a monopoly firm greater than marginal revenue? Can a monopolist charge whatever it wants for its product? Why or why not? Copyright © 2013 John Wiley 22 Key Concepts • • • • • • • Monopoly Profit Total costs of production Marginal costs of production Total revenue Marginal revenue Profit-maximizing output level Perfect competition ã Price takers Copyright â 2013 John Wiley • • 23 ... firms that are able to set the prices for their products Copyright © 2013 John Wiley 15 Market Demand and Marginal Revenue under Monopoly Copyright © 2013 John Wiley 16 Demand and Marginal Revenue... and COSTS Copyright © 2013 John Wiley Costs of production Copyright © 2013 John Wiley Output and Revenue Copyright © 2013 John Wiley Output and Revenue Copyright © 2013 John Wiley THE PROFIT-MAXIMIZING... Buyers and sellers have complete information about prices, and firms can easily enter or exit the market Ø Identical products Ø Complete information Ø Many buyers and sellers Ø Easy entry and exit