1. 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.

2. 3rd Hour Google Classroom
q3lae

3. 5th Hour Google Classroom
gsuwytt

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

5. 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

6. Pure Competition in the Long Run09
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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. LR Supply: Constant-Cost IndustryQ 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

14. LR Supply: Increasing-Cost IndustryQ 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

15. LR Supply: Decreasing-Cost IndustryQ 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

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

17. Homework
Continue reading Chapter#9.

18. 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!

19. 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

20. 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

21. 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

22. 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

23. 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 s have affected traditional postal service. Online retailers like Amazon have taken business away from traditional bricks-and-mortar retailers.
9-23
LO6

24. 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

25. Efficiency Gains from EntryP1 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

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

27. Homework
Study for Chapter#9 Test Tomorrow!

28. 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

29. Homework
Begin Reading Chapter#10

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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.

38. Exit Question
61.) Where will a monopoly produce?

39. Homework
Begin Reading Chapter#10