1. University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #18 Thursday, March 11, 2004

2. ANNOUNCEMENTS REVIEW SESSION Thursday, March 18, 2004, 4:30-5:30 PM BIL 152 MID-TERM EXAMINATION #2 Tuesday, March 30, 2004, 12:00-1:15 PM BIL 152

3. LECTURE 18 Industry Structure Perfect Competition Monopoly Oligopoly Monopolistic Competition Profit Maximization Marginal Revenue = Marginal Cost: MR=MC

4. Industry Structure Industry Characteristics Perfect Competition MonopolyOligopolyMonopolistic Competition Number of firms product pricing entry

5. Industry Structure Perfect Competition MonopolyOligopolyMonopolistic Competition Number of firms manyonefewmany product Homogeneous Heterogeneous Differentiated Heterogeneous Differentiated pricingprice takerprice maker entryFree entry Free exit Barrier to entry Free entry Free exit

6. The Perfectly Competitive Firm The firm is a price-taker. Price is given. P=Price Total Revenue = TR = P*Q. Average Revenue = TR/Q = P. Marginal Revenue = ∆TR/∆Q = P.

7. Q Q $ $/Q TR = P*Q P=AR=MR demand

8. Q Q $ $ TR = P*Q TC 0 Profit = TR -TC

9. Q Q $ $ TR = P*Q TC 0 Profit = TR -TC Q* MR=MC

10. Profit Maximization Marginal Revenue = Marginal Cost MR = MC For the competitive firm P=AR=MR Therefore P=AR=MR=MC

11. Profit Maximization $/Q Q MC ATC AVC 0 A E B C Q* Firm demand: P=AR=MR P0P0 F MR=MC

12. Profit Maximization $/Q Q MC ATC AVC 0 A E B C Q* P0P0 F TR equals the area of rectangle 0P 0 FQ*. TC equals the area of rectangle 0ABQ*. Therefore, Profits equal the area of AP 0 FB. TVC equals the area of rectangle 0ECQ*. TFC equals the area of rectangle EABC. Economic Profit

13. Profit Maximization $/Q Q MC ATC AVC 0 E B C Q0Q0 Firm demand: P=AR=MR P0P0 TR equals the area of rectangle 0P 0 BQ 0. TC equals the area of rectangle 0P 0 BQ 0. Therefore, Profits equal zero. TVC equals the area of rectangle 0ECQ 0. TFC equals the area of rectangle EP 0 BC.

14. Profit Maximization $/Q Q MC ATC AVC 0 E B C Q0Q0 Firm demand: P=AR=MR P0P0 F A Are the firm’s profits positive, negative or zero? Should the firm shut-down or continue to operate? Economic Loss

15. Firm Supply $/Q Q MC ATC AVC P 0 0 P 2 P 1 Q0Q0 P 1 =AR 1 =MR 1 P 0 =AR 0 =MR 0 P 2 =AR 2 =MR 2 Q1Q1 Q2Q2