Economics Winter 14 March 28 th, 2014 Lecture 28 Ch. 12: Perfect competition Ch. 13: Pure monopoly

FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14 Its format: 100 Multiple-Choice Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140 Extra Office Hours: April 19, from 1:00 p.m. to 3:00 p.m. Final Exam:

Note: For questions take all companies (firms) are identical in the market.

Long-run Supply It shows how the quantity supplied in a market varies as the market price varies after all possible adjustments have been made, including changes in each firm’s plant and the number of firms in the market NB! Crucial factor is whether the number of firms in the industry affects the costs of individual firms

CONSTANT-COST INDUSTRY means that industry expansion or contraction will not affect resource prices and therefore production costs. Increase in demand causes an expansion in industry output, but no alterations in price. Decrease in demand causes a contraction of output, but no change in price. This means that the long-run industry supply curve is HORIZONTAL.

LR Supply curve

ANSWER SHOWN BELOW:

INCREASING-COST INDUSTRY means that the entry of firms in response to increases in demand will bid up resource prices and thereby increase unit costs. The long-run industry supply curve therefore SLOPES UPWARD.

DECREASING-COST INDUSTRY means that firms may experience lower costs as the industry expands. That is why the long-run supply curve of a decreasing cost industry is DOWNSLOPING.

Long-Run Changes in Price and Quantity Constant-cost industry Increasing-cost industry Decreasing-cost industry Quantity Price P0P0P0P0 Q0Q0Q0Q0 S0S0S0S0 Quantity Price P0P0P0P0 Q0Q0Q0Q0 D0D0D0D0 S0S0S0S0 Quantity Price P0P0P0P0 Q0Q0Q0Q0 D0D0D0D0 D1D1D1D1 D1D1D1D1 D1D1D1D1 S0S0S0S0 PsPsPsPs PsPsPsPs PsPsPsPs QsQsQsQs QsQsQsQs QsQsQsQs LS A LS C S1S1S1S1 Q1Q1Q1Q1 S3S3S3S3 P3P3P3P3 Q3Q3Q3Q3 S2S2S2S2 P2P2P2P2 Q2Q2Q2Q2 LS B D0D0D0D0

STUDY QUESTION: Suppose an increase in product demand occurs in a decreasing-cost industry. As a result: a)The new long-run equilibrium price will be lower than the original long-run price. b)Equilibrium quantity will decline. c)Firms will eventually leave the industry. d)The new long-run equilibrium price will be higher than the original price.

STUDY QUESTION: Suppose an increase in product demand occurs in a decreasing-cost industry. As a result: a)The new long-run equilibrium price will be lower than the original long-run price. b)Equilibrium quantity will decline. c)Firms will eventually leave the industry. d)The new long-run equilibrium price will be higher than the original price. ANSWER SHOWN BELOW:

Ch. 13: Pure Monopoly

Introduction Monopoly is a market structure in which a single firm makes up the entire supply side of the market. Monopoly is the polar opposite of perfect competition. Characteristics: Single seller No close substitutes Price-maker Blocked entry

Barriers to Entry include Legal barriers that create a legal monopoly A legal monopoly is a market in which competition and entry are restricted by the granting of a  Public franchise (like the Canada Post, a public franchise to deliver first-class mail)  Government license (like a license to practice law or medicine)  Patent or copyright Ownership Barriers (if one firm owns a significant portion of a key resource. For example, during the last century, De Beers owner 90 percent of the world’s diamonds) Natural barriers such as the technology and size of the market that can support only one firm.

Quantity (millions) $ ATCD Economies of Scale

Monopoly Demand Three basic assumptions: Monopoly status is secured Firm is not governmentally regulated Firm charges the same price for all units Monopolist as the only supplier faces the entire market demand curve. As a result, monopoly demand is downward sloping, and to increase output the firm must decrease its price. When a monopoly increases production by one unit, it must reduce the price it charges for every unit it sells, and this cut in price reduces revenue on the units it was already selling.

P Q D revenue will revenue will increase by $132 increase by $132 with the extra unit sold unit sold When price decreases from $142 to $132, one more unit is sold…. Gain = $132 $

P Q D but revenue loss = $10 X 3 units Loss = $30 When price decreases from $142 to $132, one more unit is sold…. Gain = $132 Marginal revenue = $ = $102 < $132 (price) Marginal revenue = $ = $102 < $132 (price) $142

The Key Difference Between a Monopolist and a Perfect Competitor Marginal revenue is not equal to its price – it takes into account that in order to sell more it has to decrease the price of its product. A monopolistic firm’s

QPTR 0$

QPTR 0$172$ MR

QPTR 0$172$ MR $162 ]

QPTR 0$172$ MR $ Notice that MR < p ] ] ] ] ] ] ] ] ] ]

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Monopoly Demand: a summary 1.Marginal revenue is less than price 2.The monopolist is a price-maker 3.The monopolist sets prices in the elastic region of demand

The Monopolist’s Price and Output Graphically To determine the profit-maximizing price and quantity: –one first finds output (where MC = MR), and then –extends a vertical line for that output, up to the demand curve to find the price (P m ).