Competition and Market Structures Class 4 Some Basic Microeconomic Tools. Ref: Some Basic Microeconomic Tools. Chapter 2. Industrial Organization – Contemporary.

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Presentation transcript:

Competition and Market Structures Class 4 Some Basic Microeconomic Tools. Ref: Some Basic Microeconomic Tools. Chapter 2. Industrial Organization – Contemporary Theory & Practice. Third Edition. Pepall – Richards - Norman. Thomson Ed. pp Industrial Economics Flavio Pinto

Contents The Demand Function Profit Profit Maximization Market Poles Competitive Markets Monopoly Markets Efficiency and Surplus Contents

The Demand Function Basics about Demand q: Q:  P Q

Profit Applicable to all market Profit: Revenue: Cost:

Profit Maximization Applicable to all markets Firm’s Objective: Derivatives: $ q

Market Poles: Competitive and Monopoly Market Poles P q P Q

Competitive Markets Firms are price takers Maximization: $ q

Exercise 1 (p. 25) Competitive Markets Cellular phones Q = TC = q 2 +10q Show that a firm industry maximizes profit by producing… Derive the industry supply curve Find the market price and the aggregate quantity traded in equilibrium $ q

Monopoly Markets Monopolies impose the price Marginal Revenue $/unit Q

Monopoly Markets Maximization of Profit $/unit Q

Exercise 2 (p. 30) Competitive Markets Cellular phones Q = Show that a MR function is: Show that the profit maximzing is> $ q

Efficiency and Surplus $ Q

Efficiency and Surplus: Competitive and Monopoly Market Poles P Q P Q

Exercise 3 (p. 40) Competitive Markets Water is produced and sold by the government Q = P TC = q How much should the government charge per unit of water in order to reach the efficient allocation? How much if it searches to maximize the profit? What is the efficiency lost?