Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan CHAPTER 18 COMPETITION AND MONOPOLY Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: Daniel Acker/Bloomberg via GettyImages, Inc.

 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  Assess the economic efficiency of firms in perfect competition versus monopolies  Understand why some economists argue for regulation of monopoly power Copyright © 2013 John Wiley & Sons, Inc. 2 AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

Copyright © 2013 John Wiley & Sons, Inc. 3 PROFITS AND COSTS

Copyright © 2013 John Wiley & Sons, Inc. 4 COSTS OF PRODUCTION

Copyright © 2013 John Wiley & Sons, Inc. 5 OUTPUT AND REVENUE

Copyright © 2013 John Wiley & Sons, Inc. 6 OUTPUT AND REVENUE

 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 & Sons, Inc. 7 THE PROFIT-MAXIMIZING OUTPUT LEVEL

Copyright © 2013 John Wiley & Sons, Inc. 8 THE PROFIT-MAXIMIZING OUTPUT LEVEL

Copyright © 2013 John Wiley & Sons, Inc. 9 THE PROFIT-MAXIMIZING OUTPUT LEVEL

 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.  Identical products  Complete information  Many buyers and sellers  Easy entry and exit Copyright © 2013 John Wiley & Sons, Inc. 10 PERFECT COMPETITION

 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:  is a price taker  sells all its products at the same price  MR = P Copyright © 2013 John Wiley & Sons, Inc. 11 PRICE TAKER AND MARGINAL REVENUE

Copyright © 2013 John Wiley & Sons, Inc. 12 PERFECT COMPETITION MARKET AND FIRM

 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. Copyright © 2013 John Wiley & Sons, Inc. 13 NORMAL PROFIT AND ECONOMIC PROFIT

 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 & Sons, Inc. 14 MONOPOLY

 A monopolist is a price setter.  Price Setters are firms that are able to set the prices for their products. Copyright © 2013 John Wiley & Sons, Inc. 15 PRICE SETTERS

Copyright © 2013 John Wiley & Sons, Inc. 16 MARKET DEMAND AND MARGINAL REVENUE UNDER MONOPOLY

Copyright © 2013 John Wiley & Sons, Inc. 17 DEMAND AND MARGINAL REVENUE UNDER MONOPOLY

Copyright © 2013 John Wiley & Sons, Inc. 18 PROFIT-MAXIMIZING OUTPUT FOR MONOPOLY FIRMS

Copyright © 2013 John Wiley & Sons, Inc. 19 COMPARING PERFECT COMPETITION AND MONOPOLY

 Resource allocative e fficiency results from the situation where MB = MC for the society  Under Perfect Competition MB = P = MR = MC Efficient  Under Monopoly MB = P > MR = MC Inefficient At the level of output Q*(m), MB = P > MC implies room for improving efficiency Copyright © 2013 John Wiley & Sons, Inc. 20 PERFECT COMPETITION, MONOPOLY, AND EFFICIENCY

 Antitrust Laws are laws that promote competition between businesses and prohibit anti-competitive behavior by firms with large control over markets.  Sherman Anti-Trust Act  Clayton Anti-Trust Act  The Federal Trade Commission Copyright © 2013 John Wiley & Sons, Inc. 21 MONOPOLY REGULATION

QUESTIONS/DISCUSSIONS Copyright © 2013 John Wiley & Sons, Inc Why is the price for a perfectly competitive firm equal to marginal revenue but the price for a monopoly firm greater than marginal revenue? 2.Can a monopolist charge whatever it wants for its product? Why or why not?

Copyright © 2013 John Wiley & Sons, Inc. 23 KEY CONCEPTS Monopoly Profit Total costs of production Marginal costs of production Total revenue Marginal revenue Profit-maximizing output level Perfect competition Price takers Normal profit Economic profit Barriers to entry Price setters Antitrust laws