Economics 3/20/17 http://mrmilewski.com OBJECTIVE: Examine Pure Competition in the long run. AP Micro-3.9 Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Administrative Stuff -attendance -Review Macro Final Exam II. Chapter#9 Homework -Answer questions (1-5) & Problems (1-2) p.193 Notice: Grades posted to Google classroom tonight.

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Homework Answer Questions (1-5) and Problems (1-2) p.193

Economics 3/21/17 http://mrmilewski.com OBJECTIVE: Examine Pure Competition in the long run. AP Micro-3.9 Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Daily Opener#59 -ACDC Econ Micro 3.9 Perfect Competition in the Long Run -Welker Long Run Video II. Notes#59 -notes on pure competition in the long run Notice: Chapter#9 Test Thursday

Pure Competition in the Long Run 09 Pure Competition in the Long Run The long‑run equilibrium position for a competitive industry is shown by reviewing the process of entry and exit in response to relative profit levels in the industry. Long‑run supply curves and the conditions of constant, increasing, and decreasing costs are explored. Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

The Long Run in Pure Competition In the long run: Firms can expand or contract capacity Firms enter and exit the industry Recall that in the short run the industry is fixed in both the number of sellers and the plant size of existing sellers. In the long run all of these restrictions are relaxed. 9-7 LO1

Profit Maximization in the Long Run Easy entry and exit The only long run adjustment we consider Identical costs All firms in the industry have identical costs Constant-cost industry Entry and exit do not affect resource prices In our model all firms have identical costs. Therefore they will all make the same production decisions since they also all face the same market price. The goal of the firm is to make profits and avoid losses. This is easy to do in pure competition due to the easy entry into the industry and easy exit out of the industry. 9-8 LO2

Entry eliminates profits Firms enter Supply increases Price falls Long-Run Equilibrium Entry eliminates profits Firms enter Supply increases Price falls Exit eliminates losses Firms exit Supply decreases Price rises Profits attract firms from less profitable industries and losses cause them to leave the unprofitable industry to find another more profitable one. This reflects the supply determinant, a change in the number of sellers. 9-9 LO3

Entry Eliminates Economic Profits Single Firm (b) Industry P q Q 100 90,000 80,000 100,000 S1 MC $60 50 40 ATC $60 50 40 S2 MR D2 D1 These graphs show temporary profits and the re-establishment of long-run equilibrium in (a) a representative firm and (b) the industry. A favorable shift in demand (D1 to D2) will upset the original industry equilibrium and produce economic profits. As a result, those profits will entice new firms to enter the industry, increasing supply (S1 to S2) and lowering product price until economic profits are once again zero. In other words, an increase in demand temporarily raises price. Higher prices draw in new competitors. Increased supply returns price to equilibrium. 9-10 LO3

Exit Eliminates Losses Single Firm (b) Industry P q Q 100 90,000 80,000 100,000 S3 MC $60 50 40 $60 50 40 ATC S1 MR D1 D3 Temporary losses and the re-establishment of long-run equilibrium in (a) a representative firm and (b) the industry. A decrease in demand temporarily lowers price. Lower prices drive away some competitors and the decrease in supply returns price to equilibrium 9-11 LO3

Constant cost industry Entry/exit does not affect LR ATC Long Run Supply Constant cost industry Entry/exit does not affect LR ATC Constant resource price Special case Increasing cost industry Most industries LR ATC increases with expansion Specialized resources Decreasing cost industry In this first scenario, the constant-cost industry, the number of firms entering or leaving the industry do not affect costs. In this second scenario, entry or exit of firms does affect costs. When firms enter the industry, input costs will increase as firms enter the industry and input costs will fall as firms exit the industry. The long-run supply curve is upsloping. In the decreasing cost industry, as the number of firms increase or decrease due to entry or exit, the industry costs change inversely. If demand for their product falls, firms will leave the industry causing input costs to rise. If demand for their product increases, firms will enter the industry causing input costs to fall. The long-run supply curve is downsloping. 9-12 LO4

LR Supply: Constant-Cost Industry Q P1 P2 P3 $50 S Z3 Z1 Z2 In a constant-cost industry, entry and exit of firms does not affect resource prices and therefore does not affect per-unit costs. So an increase in demand raises output but not price. Similarly, a decrease in demand reduces output but not price. Therefore, the long-run supply curve is horizontal. D3 D1 D2 Q3 Q1 Q2 90,000 100,000 110,000 9-13 LO4

LR Supply: Increasing-Cost Industry Q S P2 $55 Y2 P1 $50 Y1 P3 $40 Y3 The long-run supply curve for an increasing-cost industry is upsloping. In an increasing-cost industry, the entry of new firms in response to an increase in demand (D3 to D1 to D2) will bid up resource prices and thereby increase unit costs. As a result, an increased industry output (Q3 to Q1 to Q2) will be forthcoming only at higher prices ($55>$50 > $45). The long-run industry supply curve (S) therefore slopes upward through points Y3, Y1, and Y2. D2 D1 D3 Q3 Q1 Q2 90,000 100,000 110,000 9-14 LO4

LR Supply: Decreasing-Cost Industry Q X3 P3 $55 X1 P1 $50 X2 P2 $40 S The long-run supply curve for a decreasing-cost industry is downsloping. In a decreasing-cost industry, the entry of new firms in response to an increase in demand (D3 to D1 to D2) will lead to decreased input prices and, consequently, decreased unit costs. As a result, an increase in industry output (Q3 to Q1 to Q2) will be accompanied by lower prices ($55 > $50 > $45). The long-run industry supply curve (S) therefore slopes downward through points X3, X1, and X2. D3 D2 D1 Q3 Q1 Q2 90,000 100,000 110,000 9-15 LO4

Exit Question 59.) In pure competition, what is the long run economic profit?

Homework Continue reading Chapter#9.

Economics 3/22/17 http://mrmilewski.com OBJECTIVE: Examine Pure Competition in the long run. AP Micro-3.9 Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Daily Opener#60 -no daily opener Ch#8 Retake II. Notes#60 -notes on pure competition in the long run Notice: Chapter#9 Test TOMORROW!

Pure Competition and Efficiency In the long run, efficiency is achieved Productive efficiency Producing where P = min. ATC Allocative efficiency Producing where P = MC Productive efficiency is producing goods in the least costly way. Allocative efficiency is producing the mix of goods most desired by society. Another bonus is consumer surplus and producer surplus are maximized in the long run in pure competition. Note: P=min ATC=MC does not occur in decreasing cost industries. 9-19 LO5

Pure Competition and Efficiency Single Firm Market Price Quantity P=MC=Minimum ATC (Normal Profit) MC Consumer Surplus S ATC P MR P Producer Surplus Productive Efficiency: Price=minimum ATC Allocative Efficiency: Price=MC Pure competition achieves both efficiencies in its long-run equilibrium. This is important because it indicates the firm is using the most efficient technology, charging the lowest price, and producing the greatest output consistent with its costs. The firm is using society’s scarce resources in accordance with consumer preferences. The sum of consumer surplus (green area) and producer surplus (blue area) is maximized. D Qf Qe 9-20 LO5

Purely competitive markets will automatically adjust to: Dynamic Adjustments Purely competitive markets will automatically adjust to: Changes in consumer tastes Resource supplies Technology Recall the “Invisible Hand” Dynamic adjustments will occur automatically in pure competition when changes in demand, resource supplies, or technology occur. Disequilibrium will cause expansion or contraction of the industry until the new equilibrium at P = MC occurs. “The invisible hand” works in a competitive market system since no explicit orders are given to the industry to achieve the P = MC result. The profit motivation brings about highly desirable economic outcomes. 9-21 LO6

Technological Advance: Competition Entrepreneurs would like to increase profits beyond just a normal profit Decrease costs by innovating New product development Innovation means using better technology or improved business organization. New product development means the firm may be first to the market with a new product but others will soon follow and may destroy the innovating firm’s position. 9-22 LO6

Competition and innovation may lead to “creative destruction” Creation of new products and methods destroys the old products and methods Creative destruction refers to the idea that the creation of new products and new production methods destroys the market positions of firms committed to existing products and old ways of doing business. An example of creative destruction is the CD (compact disc) being replaced with music downloads. Faxes and emails have affected traditional postal service. Online retailers like Amazon have taken business away from traditional bricks-and-mortar retailers. 9-23 LO6

Efficiency Gains from Entry Patent protected prescription drugs earn substantial economic profits for the pharmaceutical company. Generic drugs become available as the patent expires on the existing drug. Results in a 30-40% reduction price Greater consumer surplus and efficiency Patents give firms 20 years exclusive rights to a product. In medicine, the patent application may use up some of this time and once the product hits the market, it may have only some of that 20-year right left. Patents are used to encourage research and development of new drugs and provide the pharmaceutical company enough time to recoup the R&D expenditures invested in the drug. This new competition can result in a 30-40% reduction in the drug’s price. Consumer surplus increases and efficiency is enhanced as a result. 9-24

Efficiency Gains from Entry P1 b c d f P2 This new competition can result in a 30-40% reduction in the drug’s price. Consumer surplus increases and efficiency is enhanced as a result. D Q1 Q2 9-25

Exit Question 60.) When is the Chapter#9 Test?

Homework Study for Chapter#9 Test Tomorrow!

Economics 3/23/17 http://mrmilewski.com OBJECTIVE: Demonstrate mastery of pure competition in the long run. AP Micro-3.9 Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Administrative Stuff -attendance & review II. Chapter#9 Test -test on pure competition in the long run Homework: Begin Reading Chapter#10

Homework Begin Reading Chapter#10

Economics 3/24/17 http://mrmilewski.com OBJECTIVE: Examine Pure Monopoly. AP Micro-4.1 Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Daily Opener#61 -ACDC Econ Micro 4.1 Monopoly Demand & MR -ACDC Econ Micro 4.2 Monopoly Graph II. Notes#61 -notes monopoly Notice: Read Chapter#10

10 Pure Monopoly This chapter is divided into six basic sections: the characteristics of pure monopoly, the barriers to entry that create and protect monopolies, price and output determination under monopoly, the economic effects of monopoly, price discrimination under monopoly, and the regulation of monopolies. The discussion of barriers to entry states at the outset that these barriers may occur to some extent in any form of imperfect competition, not just in a pure monopoly. The concept of a natural monopoly is addressed in this section. Building on the analysis of the preceding chapter, the discussion of the price‑output decision-making by monopoly firms points out that the marginal-revenue—marginal-cost rule still applies. Emphasis here is on the major difference between the determination of marginal revenue in pure competition and in pure monopoly. The misconceptions about monopoly pricing behavior are presented, as well as a comparison of efficiency in pure competition and pure monopoly. This section ends with a discussion of the effects of monopoly power in the U.S. economy and some policy alternatives. The case of price discrimination and its effects are discussed along with the conditions necessary for it to occur. At the end of the chapter, the basic issues involved in the regulation of public service monopolies are reviewed. Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

An Introduction to Pure Monopoly Single seller – a sole producer of a specific good or service. The firm and the industry are one No close substitutes – unique product that nobody else produces. Price maker – control over price and quantity supplied. Blocked entry – strong barriers to entry block potential competition. The barriers can be economic, technological or legal for example. Non-price competition – the product produced can be standardized (utilities) or differentiated (Windows). Standardized products use mostly PR for product awareness and differentiated products will use advertising to promote their product. A pure monopoly means that there is only one producer of the good with no close substitutes being produced by any other firms. Since the firm is the industry, they have control over the price that is charged for their good. Monopolies are created and sustained due to strong entry barriers which makes it very difficult for new firms to enter the industry. There is very little non-price competition since there are not any rival firms. There is some non-price competition which merely meant to increase the demand for the good. 10-32 LO1

Examples of Monopoly Pure monopolies are very rare, but there are other firms that exist that are close. Public utility companies Natural Gas Electric Water Near monopolies Intel Wham-O Professional Sports Teams Pure monopolies are rare but many examples of near monopolies exist. Examples of monopoly or near-monopolies today include the gas company, electric company, and the cable TV company. Private companies such as Intel and Wham-O have significant market share. Even professional sports teams may enjoy being a monopoly in their respective geographical area. Of course, there is almost always some competition even for these firms. 10-33 LO1

Barriers to Entry Barrier to Entry: factors that keeps firms from entering an industry: Economies of Scale – Declining ATC with added firm size makes it difficult for a new firm to start up. They cannot realize the economies of scale. Legal Barriers: Patents and Licenses. Patents enable monopolies to have the exclusive right to an invention. Licensing makes it difficult for new firms to enter because there is a limited number of licenses. For example, the taxi cab business in a large city. Ownership of Essential Resources – a monopoly can own or control the resources necessary to produce their product. Pricing – A monopoly can prevent new firms from entereing by slashing their prices. Economies of scale constitute one major barrier. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale. 1. Public utilities are often natural monopolies because they have economies of scale in the extreme case where one firm is most efficient in satisfying the entire demand. 2. Government usually gives one firm the right to operate a public utility industry in exchange for government regulation of its power. Legal barriers to entry into a monopolistic industry also exist in the form of patents and licenses. 1. Patents grant the inventor the exclusive right to produce or license a product for twenty years; this exclusive right can earn profits for future research, which results in more patents and monopoly profits. 2. Licenses are another form of entry barrier. Radio and TV stations and taxi companies are examples of government granting licenses where only one or a few firms are allowed to offer the service. Ownership or control of essential resources is another barrier to entry. 1. International Nickel Co. of Canada (now called Inco) used to control about 90 percent of the world’s nickel reserves and DeBeers of South Africa controls most of the world’s diamond supply (see Last Word). 2. Professional sports leagues control player contracts and leases on major city stadiums. Monopolists may use pricing or other strategic barriers such as selective price-cutting and advertising. 1. Dentsply, manufacturer of false teeth, controlled about 70 percent of the market. In 2005 Dentsply was found to have illegally prevented distributors from carrying competing brands. 2. Microsoft charged higher prices for its Windows operating system to computer manufacturers featuring Netscape Navigator instead of Microsoft’s Internet Explorer. U.S. courts ruled this action illegal. 10-34 LO1

Economies of Scale Average total cost Quantity $20 15 10 50 100 200 Average total cost Quantity $20 15 ATC 10 A declining long-run average-total-cost curve over a wide range of output quantities indicates extensive economies of scale. A single monopoly firm can produce, say, 200 units of output at lower cost ($10 each) than could two or more firms that had a combined output of 200 units. 50 100 200 10-35 LO1

Monopoly Demand The pure monopolist is the industry The demand curve is the market demand curve, also. The difference between a pure competitor and a pure monopolist is on the demand side. Instead of a purely elastic demand curve like pure competition, it is a down-sloping demand curve. The following analysis of monopoly demand makes three assumptions: 1.The monopoly is secured by patents, economies of scale, or resource ownership. 2.The firm is not regulated by any unit of government. 3.The firm is a single‑price monopolist; it charges the same price for all units of output. 10-36 LO1

Marginal Revenue is Less Than Price Marginal revenue is less than price – The only way for a monopolist to increase sales is by charging a lower price. But by doing so, they forgoe the revenue from the higher price. For example: If a monopolist is selling a product at $100 and then lowered the price to $90 to sell additional units, they would lose $10/unit in marginal revenue. If they sold 5 units their revenue would be $450, but had it been at the original price, they would have earned $500. The next unit they sell will actually generate a revenue of $40.($90 less the $50 forgone on the first five units sold) So, clearly, marginal revenue is less than price.

Exit Question 61.) Where will a monopoly produce?

Homework Begin Reading Chapter#10