Monopoly profit ATC Quantity P 1 Q1Q1 0 Costs D MR MC ATC E1E1 Key Micro Relationships Socially Optimal P = MC Normal Profit P = ATC Max. Total Rev: MR.

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Presentation transcript:

Monopoly profit ATC Quantity P 1 Q1Q1 0 Costs D MR MC ATC E1E1 Key Micro Relationships Socially Optimal P = MC Normal Profit P = ATC Max. Total Rev: MR = Zero Max Profit MR = MC Allocative Efficient P = MC Productive Efficiency P = min ATC

Perfect Competition Monopolistic Competition OligopolyMonopoly 4 Market Structures Equilibrium Price vs. MC P = MC P > MC (DWL) P > MC (DWL) P > MC (DWL) Maximize Profit When: MR = MC Long Run Economic Profit No Yes Demand & Marginal Revenue Curve D = MR MC End Result: No DWL Lowest Px Highest Qty Largest DWL Highest Px Lowest Qty

Efficiency Review Allocative Efficiency when P = MC –3 market structures fail as P > MC (monopoly, oligopoly, monopolistic competition) –Only Competitive firms are Allocatively Efficient Production Efficiency when P = min. of ATC –3 market structures fail as P > min of ATC (efficient scale production) –Competitive Firms achieve it only in long run Competitive Markets P = MC (always) P = min of ATC (long run) (Efficient Scale Production) 3 Market Structures P > MC P > min of ATC

INELASTIC = SMALL deadweight loss ELASTIC = LARGE deadweight loss DWL & Elasticity Elastic Supply Elastic Demand Inelastic Supply Inelastic Demand

Rent Seeking When a firm uses excess profit (profit > zero) to gain political influence in regulation –Example: lobbying

Competitive Firms vs. Monopsony All firms* are competitive in the FACTOR market –Hire labor where MRP = MFC –All Firms are “wage takers” (*except a Monsopony)

Monopsony Definition: When one firm is the sole purchaser of labor in the factor market –Example: only buyer of labor in a small town This means a monopsony can not hire more workers without wage rate rising (NOT A WAGE TAKER) End Result: a Monsopony will pay a LOWER WAGE & HIRE LESS WORKERS