10/17/2014

1
Which of the following would most likely
be a fixed cost in a factory?
A. The cost of electricity to
run machinery
B. The cost of raw materials
C. The cost of property
insurance
D. The cost of labor
10/17/2014
2
What is the marginal cost of producing
the 11
th
unit in this example?
A. $6
B. $77
C. $10
D. $110
Perfect
Competition
Pure
Monopoly
Monopolistic
Competition
Oligopoly
FOUR MARKET STRUCTURES
Every product is sold in a market that can be
considered one of the above market
structures.
For example:
1. Fast Food Market
2. The Market for Cars
3. Market for Operating Systems (Microsoft)
4. Strawberry Market
5. Cereal Market
4
10/17/2014
3
A firm in monopolistic competition might
promote its product based on . . .
A. Physical characteristics
B. Level of service
C. Location
D. All of the above
Perfect
Competition
6
10/17/2014
4
Perfect
Competition
Pure
Monopoly
Monopolistic
Competition
Oligopoly
FOUR MARKET STRUCTURES
Characteristics of Perfect Competition:
Many small firms
Identical products (perfect substitutes)
Easy for firms to enter and exit the industry
Seller has no need to advertise
Firms are Price Takers
The seller has NO control over price.
Examples of Perfect Competition: Avocado farmers,
sunglass huts, and hammocks in Mexico
Imperfect Competition
7
Law of One Price
8
In an efficient market, all identical goods must have
only one price.
Result: Each firm is a price taker. Firms have no
control of the price
Traffic Analogy
When there is heavy traffic, why
do all lanes seem to go the
same speed?
Cars leave slower lanes and
enter faster lanes.
Similarly, what happens in
perfectly competitive markets if
firms earn excessive profit?
10/17/2014
5
9
Perfectly Competitive Firms
Example:
Say you go to Mexico to buy a hammock.
After visiting at few different shops you find that
the buyers and sellers always agree on $15.
This is the market price (where demand and
supply meet)
1. Is it likely that any shop can sell hammocks for $20?
2. Is it likely that any shop will sell hammocks for $10?
3. What happens if a shop prices hammocks too high?
4. Do you think that these firms make a large profit off
of hammocks? Why?
These firms are price takers because the sell their
products at a price set by the market.
10
10/17/2014
6
In a perfectly competitive market, the
price a firm gets for its product is equal to:
A. Marginal Revenue
B. Average Revenue
C. Demand price regardless of
quantity
D. All of the above
E. (A) and (C) only
Demand for Perfectly Competitive Firms
Why are they Price Takers?
If a firm charges above the market price, NO ONE
will buy. They will go to other firms
There is no reason to price low because
consumers will buy just as much at the market
price.
Since the price is the same at all quantities
demanded, the demand curve for each firm is
Perfectly Elastic
(A Horizontal straight line)
12
10/17/2014
7
P
Q
Demand
P
Q
5000
D
S
Industry
Firm
(price taker)
$15 $15
The Competitive Firm is a Price Taker
Price is set by the Industry
13
14
What is the additional
revenue for selling an
additional unit?
1
st
unit earns $15
2
nd
unit earns $15
Marginal revenue is
constant at $15
Notice:
Total revenue increases
at a constant rate
MR equal Average
Revenue
P
Q
Demand
Firm
(price taker)
$15
14
MR=D=AR=P
The Competitive Firm is a Price Taker
Price is set by the Industry
10/17/2014
8
15
What is the additional
revenue for selling an
additional unit?
1
st
unit earns $15
2
nd
unit earns $15
Marginal revenue is
constant at $15
Notice:
Total revenue increases
at a constant rate
MR equal Average
Revenue
P
Q
Demand
Firm
(price taker)
$15
15
MR=D=AR=P
The Competitive Firm is a Price Taker
Price is set by the Industry
For Perfect Competition:
Demand = MR
(Marginal Revenue)
Maximizing
PROFIT!
16
10/17/2014
9
Short-Run Profit Maximization
What is the goal of every business?
To Maximize Profit!!!!!!
To maximum profit firms must make the right
output
Firms should continue to produce until the
additional revenue from each new output equals
the additional cost.
Example (Assume the price is $10)
Should you produce
if the additional cost of another unit is $5
if the additional cost of another unit is $9
if the additional cost of another unit is $11
17
Short-Run Profit Maximization
What is the goal of every business?
To Maximize Profit!!!!!!
To maximum profit firms must make the right
output
Firms should continue to produce until the
additional revenue from each new output equals
the additional cost.
Example (Assume the price is $10)
Should you produce
if the additional cost of another unit is $5
if the additional cost of another unit is $9
if the additional cost of another unit is $11
18
Profit Maximizing Rule
MR=MC
10/17/2014
10
Lets put costs and revenue together
on a graph to calculate profit.
I have deleted the cost-curve graphs we
briefly reviewed in class that was for
background only; you are not responsible
for the cost curve material
19
10/17/2014
11
Monopolistic
Competition
Monopolistic
Competition
21
Characteristics of Monopolistic
Competition:
Relatively Large Number of Sellers
Differentiated Products
Some control over price
Easy Entry and Exit (Low Barriers)
A lot of non-price competition
(Advertising)
22
Perfect
Competition
Pure
Monopoly
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Monopolistic
Competition
Oligopoly
10/17/2014
12
Examples:
1. Fast Food Restaurants
2. Furniture companies
3. Jewelry stores
4. Hair Salons
5. Clothing Manufacturers
23
Monopolistic Qualities
Control over price of own good due to
differentiated product
D greater than MR
Plenty of Advertising
Not efficient
Monopoly + Competition
Perfect Competition Qualities
Large number of smaller firms
Relatively easy entry and exit
Zero Economic Profit in Long-Run
since firms can enter
24
10/17/2014
13
4. Monopolistic competitors are least
likely to compete based on . . .
A. Packaging
B. Product Attributes
C. Service
D. Location
E. Price
A. B. C. D. E.
1 1 1 1 1
Goods are NOT identical.
Firms seek to capture a piece of the
market by making unique goods.
Since these products have substitutes,
firms use NON-PRICE Competition.
Examples of NON-PRICE Competition
Brand Names and Packaging
Product Attributes
Service
Location
Advertising (Two Goals)
1. Increase Demand
2. Make demand more INELASTIC 26
Differentiated Products
10/17/2014
14
27
Differentiated Products
Drawing Monopolistic
Competition
(I have deleted the cost-
curve graphs we briefly
reviewed in class that was
for background only; you are
not responsible for the cost
curve material)
28
10/17/2014
15
Why does DEMAND shift?
When short-run profits are made
New firms enter.
New firms mean more close substitutes and less
market shares for each existing firm.
Demand for each firm falls.
When short-run losses are made
Firms exit.
Result is less substitutes and more market shares
for remaining firms.
Demand for each firm rises.
Careful: Distinguish between new sellers in
monopolistic competition (shifts demand) and new
sellers in perfect competition (shifts supply)!
29
Large number of firms and product
variation meets societies needs.
Nonprice Competition (product
differentiation and advertising) may
result in sustained profits for some firms.
Ex: Nike might continue to make above
normal profit because they are a well
known brand.
Advantages of
MONOPOLISTIC COMPETITION
30