1. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 1 Market Structure Perfect Competition Monopolistic Competition Oligopoly Monopoly More Competitive Less Competitive

2. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 2 Perfect Competition Many buyers and sellers Buyers and sellers are price takers Product is homogeneous Perfect mobility of resources Economic agents have perfect knowledge Example: Stock Market

3. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 3 Monopolistic Competition Many sellers and buyers Differentiated product Perfect mobility of resources Example: Fast-food outlets

4. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 4 Oligopoly Few sellers and many buyers Product may be homogeneous or differentiated Barriers to resource mobility Example: Automobile manufacturers

5. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 5 Monopoly Single seller and many buyers No close substitutes for product Significant barriers to resource mobility –Control of an essential input –Patents or copyrights –Economies of scale: Natural monopoly –Government franchise: Post office

6. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 6 Perfect Competition: Price Determination

7. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 7 Perfect Competition: Price Determination

8. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 8 Perfect Competition: Short-Run Equilibrium Firm’s Demand Curve = Market Price = Marginal Revenue Firm’s Supply Curve = Marginal Cost where Marginal Cost > Average Variable Cost

9. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 9 Perfect Competition: Short-Run Equilibrium

10. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 10 Perfect Competition: Long-Run Equilibrium Price = Marginal Cost = Average Total Cost Quantity is set by the firm so that short-run: At the same quantity, long-run: Price = Marginal Cost = Average Cost

11. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 11 Perfect Competition: Long-Run Equilibrium

12. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 12 Monopoly Single seller that produces a product with no close substitutes Sources of Monopoly –Control of an essential input to a product –Patents or copyrights –Economies of scale: Natural monopoly –Government franchise: Post office

13. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 13 Monopoly Short-Run Equilibrium Demand curve for the firm is the market demand curve Firm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR) Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output

14. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 14 Monopoly Short-Run Equilibrium Q* = 500 P* = $11

15. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 15 Monopoly Long-Run Equilibrium Q* = 700 P* = $9

16. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 16 Social Cost of Monopoly

17. Monopoly Price Discrimination Under certain conditions, a firm with market power is able to charge different customers different prices. This is called price discrimination. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 17

18. In order to price discriminate, a monopolist must be able to: Identify groups of customers who have different elasticities of demand; Separate them in some way; and Limit their ability to resell its product between groups. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 18

19. A price-discriminating monopolist can increase both output and profit. It can charge customers with more inelastic demands a higher price. It can charge customers with more elastic demands a lower price. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 19

20. Perfect Price Discrimination By discriminating, a monopoly firm makes greater profits than it would make by charging both groups the same price. A firm with market power could collect the entire consumer surplus if it could charge each customer exactly the price that that customer was willing and able to pay. This is called perfect price discrimination. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 20

21. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 21 Monopolistic Competition Many sellers of differentiated (similar but not identical) products Limited monopoly power Downward-sloping demand curve Increase in market share by competitors causes decrease in demand for the firm’s product

22. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 22 Monopolistic Competition Short-Run Equilibrium

23. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 23 Monopolistic Competition Long-Run Equilibrium Profit = 0

24. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 24 Monopolistic Competition Long-Run Equilibrium Cost without selling expenses Cost with selling expenses