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University of Hawai‘i at Mānoa Department of Economics

This lecture covers the industry structure in economics, including perfect competition, monopoly, oligopoly, and monopolistic competition. Topics include profit maximization and the relationship between marginal revenue and marginal cost.

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University of Hawai‘i at Mānoa Department of Economics

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  1. University of Hawai‘i at MānoaDepartment 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

  5. Industry Structure

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

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

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

  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 Firm demand: P=AR=MR MR=MC MC ATC P0 F• B AVC • A• E• • C 0 Q* Q

  12. Profit Maximization TR equals the area of rectangle 0P0FQ*. TC equals the area of rectangle 0ABQ*. Therefore, Profits equal the area of AP0FB. TVC equals the area of rectangle 0ECQ*. TFC equals the area of rectangle EABC. $/Q MC ATC P0 F• Economic Profit B AVC A• • E• • C 0 Q Q*

  13. Profit Maximization TR equals the area of rectangle 0P0BQ0. TC equals the area of rectangle 0P0BQ0. Therefore, Profits equal zero. TVC equals the area of rectangle 0ECQ0. TFC equals the area of rectangle EP0BC. $/Q MC ATC AVC B P0 • E• • C Firm demand: P=AR=MR 0 Q0 Q

  14. Profit Maximization $/Q Are the firm’s profits positive, negative or zero? Should the firm shut-down or continue to operate? MC ATC AVC B A• • Economic Loss F• P0 E• • C Firm demand: P=AR=MR 0 Q0 Q

  15. Firm Supply $/Q MC ATC AVC P2• • P2=AR2=MR2 P1• • P1=AR1=MR1 P0• • P0=AR0=MR0 0 Q0 Q1 Q2 Q

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