1. Maximizing Profit: Profit = Total Revenue - Total Cost Total Revenue (TR) = P × Q Average Revenue (AR) = TR÷Q = Chapter 9:

2. Marginal Revenue: It measures the change in total revenue generated by one additional unit of goods or services.

3. Weekly Revenue and Cost Data for a Gold Miner Price of Gold = $600 / oz

6. MC P P = MR q MR MC 0 Output

7. MC ATC AVC 0 P a q Fig. A c b

8. 12345678910 1 2 3 4 5 7 8 9 6 MC ATC AVC

9. MC ATC AVC 0 P a q b Fig. C c mn

10. MC ATC AVC q0 P a b Fig. B c

11. 12345678910 1 2 3 4 5 7 8 9 6 MC ATC AVC

12. 12345678910 1 2 3 4 5 7 8 9 6 MC ATC AVC

13. Chapter 10: Indentifying Markets and Market Structure

14. Characteristics of Perfect Competition:  Numerous small firms and customers. Firms have insignificant market share.  Homogeneity of Product. Firms produce perfect substitutes.  Freedom of Entry and Exit.  Perfect Information.

15. Demand Facing a Typical Firm in Perfect Competition D S Industry A representative Firm QQ 0 0 Q0Q0 P0P0 P = MR P0P0

16. MC ATC AVC 0 P a q Fig. A c b

17. Normal Profit: Normal Profit: The entrepreneur’s opportunity cost. It is equal to or greater than the maximum income an entrepreneur could have received employing his or her resources elsewhere. Normal Profit is included in the firm’s costs. Economic Profit: Profit that an entrepreneur makes over the Normal Profit.

18. P=20MR=MC, at Q=2000 Total Explicit Cost = 10,000 Opportunity Cost = 22,000 TC = Total (Economic) Cost =Explicit Cost + Implicit Cost Economic Profit = TR -TC TR = P x Q = 20(2000) = 40,000 TR –TC = Accounting Profit =30,000 - 22,000 =8,000 Economic Profit =40,000 -10,000

19. Exercises: AVC ATC 18 7 15 0 MC

20. Exercises: AVC ATC 0 MC 16 13 12 4

21. Long Run Equilibrium under Perfect Competition IndustryRepresentative Firm 0 0 D S0S0 P0P0 P0P0 Q0Q0 a q0q0 b c S*S* P*P* Q*Q* q*q*

23. Monopoly: This is a situation where a single producer (firm) is the sole producer of a good that has no close substitutes.

24. Sources of Monopoly:  The firm may control the entire supply of raw materials required to produce that output.  The firm may have a patent or copyright. Natural Monopoly  The case of “Natural Monopoly”. Economies of Scale may permit only one firm to be efficient in the market.

25. D ATC 0 P Q 40 2 20 2.25 1.5 Natural Monopoly

26. Sources of Monopoly:  The firm may control the entire supply of raw materials required to produce that output.  The firm may have a patent or copyright. Natural Monopoly  The case of “Natural Monopoly”. Economies of Scale may permit only one firm to be efficient in the market.  The case of Government Franchises.  Through Mergers and Acquisitions.

27. Characteristics of Monopoly:  A single seller: A single firm produces all industry output. The monopoly is the industry.  Entry into the industry is totally blocked.  Imperfect dissemination of information: Cost, price, and product quality information are withheld from uninformed buyers.

28. 23 7 8 TR 2 =AR 2 =8=P TR 3 =AR 3 =7=P MR 3 = 0 D or AR MR 8(2)=16 7(3)=21 TR 3 -TR 2 =21-16=5 Price Quantity

29. ATC AVC MC MR D P Q0 b c a Quantity Price ATC AVC MR=MC P

30. 12345678910 1 2 3 4 5 7 8 9 6 MC ATC AVC Q $ 0 6.5 MR D

31. ATC AVC MC MR D Q0 a Quantity Price P c b

32. ATC AVC MC MRD 0 a Q P Quantity Price c b n m

33. Find the Profit maximizing output from the following information. Demand InformationCost Information PQ 120 111 102 93 84 75 QTC 05 17 210 314 419 525 TR 0 11 20 27 32 35 MR -- 11 9 7 5 3 MC -- 2 3 4 5 6 Profit = TR – TC = 32 – 19 = 13

34. Monopolistic Competition: It is a form of market organization in which there are many sellers of a heterogeneous or differentiated product, and entry into and exit from the industry are rather easy in the long run. Differentiated Product: Products which are similar but not identical and satisfy the same basic need.

35. Characteristics:  Large number of buyers and sellers.  Product Heterogeneity.  Free Entry and Exit.  Perfect dissemination of information.

36. 36 The Market Structure Spectrum

37. 37 The Demand Curve for Coca-Cola: Before and After Substitutes Appear on the Market e = -1e = -. 47e = - 3

38. MC MR D P q0 a b c Quantity Price s r q1q1 D1D1 MR 1

39. P q0 a Quantity Price D2D2 MR 2 MC

40. 40 The Effect of Advertising on the Firm’s Demand Curve

41. Oligopoly: rivals This is a form of market organization in which there are few sellers of a homogeneous or differentiated product. Unlike the other forms of market structure that we have discussed, a firm in Oligopoly makes pricing and marketing decision in light of the expected response by rivals.

42. Characteristics of Oligopoly: Few Sellers: «Few Sellers: A handful of firms produce the bulk of industry output. Homogeneous or unique product: « Homogeneous or unique product: If product is homogeneous, then we have “Pure Oligopoly”. If product is differentiated, then we have “Differentiated Oligopoly”. Blockaded Entry and Exit: «Blockaded Entry and Exit: Firms are heavily restricted from entering the industry. Imperfect Dissemination of Information: «Imperfect Dissemination of Information:

43. What are some examples of Oligopoly?  Automobiles  Steel  Soup  Cereals  Gasoline

44. Measure of Market Concentration: 4 Firm Concentration Ratios: This is the percentage of total industry sales of the 4 largest firms in the industry. Firm A = 20% Firm D = 2% Firm C = 6% Firm G = 3% Firm F = 35% Firm J = 11% Firm H = 7%Firm I = 3% Firm E = 8% Firm B = 5%

45. What is an example of a high concentration ratio? Out of 151 firms in the aircraft industry the leading 4 constitutes 79% of total sales

46. What is the Herfindahl- Hirschman Index (HHI)? A measure of industry concentration, calculated as the sum of the squares of the market shares held by each firm in the industry

47. The Herfindahl-Hirschman Index: Firm A = 20% Firm D = 2% Firm C = 6% Firm G = 3% Firm F = 35% Firm J = 11%Firm H = 7%Firm I = 3% Firm E = 8% Firm B = 5% HHI = 20 2 + 5 2 + 6 2 + 2 2 + 8 2 + 35 2 + 3 2 + 7 2 + 3 2 + 11 2 HHI = 400 + 25 + 36 + 4 + 64 + 1225 + 9 + 49 + 9 + 121 = 1942 In this case 1,000 < HHI < 10,000

48. What is a Balanced Oligopoly? An oligopoly in which the sales of the leading firms are distributed fairly evenly among them What is an Unbalanced Oligopoly? An oligopoly in which the sales of the leading firms are distributed unevenly among them

49. Balanced and Unbalanced Oligopoly

50. Concentrating the Concentration: Horizontal Mergers Vertical Mergers Conglomerate Mergers A merger between firms producing the same good in the same industry A merger between firms that have a supplier - purchaser relationship A merger between firms in unrelated industries

51. What is Collusion? The practice of firms to negotiate price and market decisions that limit competition What is a Cartel? A group of firms that collude to limit competition in a market by negotiating and accepting agreed- upon price and market shares

52. How do firms in an unbalanced Oligopoly set price? Most often they practice price leadership

53. What is Price Leadership? A firm whose price decisions are tacitly accepted and followed by other firms in the industry

54. D MC F 0Quantity Price, MC DLDL MR MC QLQL QFQF Price Leadership: P

55. Imagine 3 identical firms, A, B, and C in an industry. What happens If A raises price? B and C will not raise their prices

56. Imagine 3 identical firms in an industry A, B, C what happens If A lowers price? B and C will lower their prices

57. The Kinked Demand Curve Model: Price Quantity 0 P Q

58. The Kinked Demand Curve Model: P Q Price Quantity 0

59. P Q 0 Price

60. P Q 0 Quantity Price

61. Brand Multiplication: Variations of essentially one good that a firm produces to increase its market share. Firm’s Market Share = (Number of Brands) x (Brand’s Market Share)

62. Price Discrimination : The practice of offering a specific good or service at different prices to different segments of the market.

63. q1q1 Centralized Cartels: q2q2 Q PP P 000 MR MC 1 MC 2 D