Agenda Chapter 12: Perfect Competition and Economic Efficiency Chapter 13: Monopoly Chapter 14: Monopolistic Competition
Chapter 12 • Perfect competition is an industry in which: • Many firms sell identical products to many buyers • No restrictions on entry into the industry • Established firms have no advantage over new ones • Sellers and buyers are well informed about prices
Question Billy’s Hair Gel company (Gels R Us) is a price taker. Its costs are: What is: (a) his profit-maximizing output and how much profit is made if the market price is $20/bottle, (b) the shutdown point?
Entry and Exit • Firms enter an industry in which firms are making an economic profit and exist an industry in which firms are incurring an economic loss. • Entry and exit influence price, quantity produced, and economic profit • Firms enter = supply increases • Firms exit = supply decreases
Question Suppose the demand curve shifts right. Indicate the new short-run and long-run equilibriums.
Question cont. Determine the following (short run): • Price for both the market and firm (P1) • Industry output (Q1) • Output of Firm A (q1) • Profit or losses of Firm A Determine the following (long run): • Which curve(s) in the market diagram will shift • The LR equilibrium price for market and firm(P2) • The LR equilibrium industry output (Q2) • The LR output of Firm A (q2)
Chapter 13 • Monopoly: industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entryof new firms • Price discrimination: selling different units of output for different prices • Identify and separate different buyer types • Sell a product that cannot be resold
Question • Determine the Price (Pc) and Quantity (Qc) in perfect competition. • Draw the MR curve. • What are the profit-maximizing quantity (Qm) and price (Pm)? • Mark the consumer surplus, monopoly gain, and deadweight loss.
Question • What is the profit-maximizing output and price for a monopolist. • What is the potential profit.
Question If the industry changes from perfect competition to single price monopoly then consumer surplus will a) decrease by an amount indicated by Area B b) decrease by an amount indicated by Area B + E c) decrease by an amount indicated by Area A + B + D d) not change e) increase by an amount indicated by Area B + D
Question If the industry changes from perfect competition to single price monopoly then producer surplus will a) not change b) decrease by an amount indicated by Area D c) increase by an amount indicated by Area A + B - D d) increase by an amount indicated by Area B e) increase by an amount indicated by Area B D
Chapter 14 • Monopolistic competition: a large number of firms compete; each firm produces a differentiated product; firms compete on quality, price, and marketing; firms are free to enter and exit • Short run and long run
Question • Determine profit maximizing price (P*) and output (Q*) in short run. • Determine economic profit/loss. • Compare Monopolistic competition and Perfect Competition by identifying markup and excess capacity.
Question In the long-run a monopolistically competitive firm produces where (Pick the best answer) • P = MC • LRAC is minimized • MC < LRAC • P > LRAC • Both a) and b) are true
Question Suppose that a firm in a monopolistically competitive industry produces an output level at which MR = MC = ATC. The profits of the firm are __ and firms will __ the industry. • zero; neither enter nor exit • positive; enter • zero; enter • negative; exit
Agenda Chapter 8: Utility and Demand Chapter 9: Possibilities, Preferences, and Choices Chapter 11: Output and Costs
Chapter 8 Definitions: • Utility: The benefit that a person gets from the consumption of a good or service • Total Utility: The total benefit that a person gets from the consumption of a good/service • Marginal Utility: The change in total utility that results from a one-unit increase in the quantity of good consumed.
Marginal Utility Rule A consumer’s total utility is maximized by following the rule: • Spend all available income • Equalize the marginal utility per dollar for all goods
Exercise Billy makes $40 a month. Hair gel costs $10 per bottle and T-shirts are $5 each. • How many units of each product should Billy buy to maximize his total utility? • Suppose that the price of T-shirts doubles to $10 what is the new consumer equilibrium?
What have we learned True or False (1) If the marginal utilities from consuming two goods are not equal, the consumer cannot be in equilibrium. (2) When the price of a good increases, the marginal utility from the consumption of that good decreases.
Chapter 9 Budget Line: limits to a household’s consumption choices Divisible Goods: goods that can be bought in any quantity desired Budget Equation: Expenditure = Income
Budget Equation Real Income: a household’s income expressed as a quantity of goods that the household can afford to buy Relative price: the ratio of the price of one good or service to the price of another good or service; is an opportunity cost
Change in Price or Income • Change in prices: changes the slope of the budget line • Change in income: shifts the budget line but does not change its slope
Chapter 11 Short run: time frame in which the quantity of at least one factor of production is fixed Long run: time frame in which the quantities of all factors of production can be varied Total product: maximum output that a given quantity of labour can produce Marginal product: increase in total product that results from a one-unit increase in the quantity of labour employed Average product: (Total product)/(Quantity of labour employed)
Short-Run Cost Total Cost: cost of all the factors of production a firm uses Total fixed cost: cost of the firm’s fixed factors Total variable cost: cost of the firm’s variable factors Total cost = Total fixed cost + Total variable cost Marginal cost = (Increase in total cost)/(Increase in Output)
Short-Run Cost Average Fixed cost: total fixed cost per unit of output Average variable cost: total variable cost per unit of output Average total cost: total cost per unit of output
Exercise Billy opens his own Hair Gel company (Gels R Us) and the total product schedule is: a) Draw the Total product curve, Average product curve, Marginal product curve
Exercise: Short Run Billy hires workers at $200 per month. He also has fixed costs of $200 a month. • Calculate the total cost, total variable cost, and total fixed cost at each output. • Calculate the average total cost, average fixed cost, and marginal cost of each output. • What is the relationship between the cost curves