1. Competition brings out the best in products and the worst in people.
--David Sarnoff
Created: Jan 2007 by Jim Luke.

2. Market Structures: Degrees of Competition
Aspects
# of firms
Product homogeneity
Ease of entry/exit
Form of competition
Info Availability
Created: Jan 2007 by Jim Luke.

3. Perfect Competition Assumptions & Conditions Many buyers and sellers
Homogeneous product
Fully informed
Easy entry & exit
Created: Jan 2007 by Jim Luke.

4. Some Notation P: Price per unit Q: quantity produced (sold) Curves:
MR: Marginal Revenue
MC: marginal cost
D: demand (tells price)
ATC: average total cost
Formulas:
TR=P x Q (total revenue)
Profits = (P – ATC) x Q
Created: Jan 2007 by Jim Luke.

5. Profit Maximization: Short-Run Production Decision
Produce Q so that MR=MC
If MR > MC, then next unit
Adds to Total Profits
Should Be Produced
If MR < MC, then next unit
Reduces Total Profits
Should Not Be Produced
Created: Jan 2007 by Jim Luke.

6. Profit Maximization: Produce Q so that MR=MC
Created: Jan 2007 by Jim Luke.

7. Calculate Profits After finding the Q that maximizes profits:
P – ATC = Avg Profit per unit
Created: Jan 2007 by Jim Luke.

8. Profit Maximization: All Together in 1 Graph
Marginal cost
Average total cost MR
Marginal revenue e a
Profit
Dollars per unit
Marginal Cost Equals Marginal Revenue
Created: Jan 2007 by Jim Luke.

9. Minimizing Losses In Short-Run, If P < ATC  firm loses money
If P <ATC, but P > AVC,  loss
If P < AVC,  shut-down (produce 0 units)
Created: Jan 2007 by Jim Luke.

10. The Market Price Constraint
Market S&D Determines P
Firm is “Price Taker”
P = MR
Each Firm Chooses Q* where MR=MC
If Market P Changes  MR Changes  Q* Must Change
Created: Jan 2007 by Jim Luke.

11. Competitive Dynamics Under Perfect Competition
Short-Run:
Profits Attract New Firms
 Supply increases
 Market Price drops
 Profits Drop
Losses Cause Exit
 Supply decreases
 Market Price increases
 Losses Reduced
Only Long Run Stable Point:
Firms Break Even
P = ATC
Created: Jan 2007 by Jim Luke.

12. Long-Run Equilibrium Under Perfect Competition: Efficiency
Only L.R. Stable Point:
Firms Break Even
P = ATC p d
Quantity per period MC
ATC e
LRAC q
Dollars per unit
(a) Firm
Created: Jan 2007 by Jim Luke.

13. Monopoly Conditions Sole Supplier of Good
No Close Substitutes and/or Inelastic Demand
Barriers to Entry
New Firms Not Able to Enter Industry
Created: Jan 2007 by Jim Luke.

14. Barriers to Entry Legal restrictions Govt. Licenses Patents Copyrights
Restrictive Laws
Economies of scale
“Natural Monopolies”
Control of Essential Resource
Created: Jan 2007 by Jim Luke.

15. Market Demand = Monopolist’s Demand
Slopes Downward
Max e=1.0
Can choose P or Q
Demand Determines the Other
Monopolist is Price Maker
$7,000
6,750 3 4
Price per
Diamond
1 – carat diamonds per day
D = Average
revenue
LOSS G A I N
Created: Jan 2007 by Jim Luke.

16. Profit Maximization: Simple Monopoly
Created: Jan 2007 by Jim Luke.

17. Simple Monopoly Analysis: Find Q where MR=MC
Find highest Price for that Q (go up to D curve)
Results:
Likely to make short-run profit
No change over long-run
Entry barriers prevent competition
Created: Jan 2007 by Jim Luke.

18. Market Performance Under Monopoly
Monopoly Results
NOT production efficient
not lowest ATC
NOT Allocation Efficient
P not equal to MC
Too little Q produced
Deadweight loss
Created: Jan 2007 by Jim Luke.

19. Problems From Monopolies
Inefficient Production
Inefficient Allocation of Resource
Too little Q produced
Too high Price
Rent seeking activities
No Innovation
No Choice
Created: Jan 2007 by Jim Luke.

20. Choices!
Created: Jan 2007 by Jim Luke.

21. Monopolistic Competition: Conditions
Many Small Producers
Low Concentration
Heterogenous Products
Differentiated Substitutes
Some Pricing Power
Low Entry Barriers
Sellers Act Independently
Created: Jan 2007 by Jim Luke.

22. Product Differentiation
Physical differences and qualities
Location
Accompanying services
Product image
Created: Jan 2007 by Jim Luke.

23. Monopolistic Competition
Differentiation Creates “Quasi-Monopoly”
Elastic Demand & Substitutes  Reduces Pricing Power
Low Barriers  Allows Entrants
Created: Jan 2007 by Jim Luke.

24. Oligopoly Conditions Few Firms - High Concentration
Homo- or Hetero-genous
Barriers to Entry Likely
Economies of Scale
High costs of entry
Standards or Patents
Brand
Created: Jan 2007 by Jim Luke.

25. Board game misnamed It should be: oligopoly
Created: Jan 2007 by Jim Luke.

26. The Oligopolist’s Constraint: Interdependence
Market Price Depends:
Own & Competitors’ P & Q Decisions
Competitors
Are Known
Will React
Result: Strategic Behavior
Game Theory Models
Created: Jan 2007 by Jim Luke.

27. Oligopoly “Games” or Models
Cartel / Collusion
Difficult & Not Stable
Informal, Tacit Collusion
Price Leadership / Signalling
Dominant Firms
Duopoly
Game Theory Analysis
Created: Jan 2007 by Jim Luke.

28. People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Adam Smith, The Wealth of Nations
Created: Jan 2007 by Jim Luke.