Market Structures 2

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ECON 2106: Managerial Economics Prof. Colin Mang, 2011

Lecture 8: Market Structures

Market Structures

Chapter 8


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Profit Maximization

The goal of the firm is to maximizeprofits

= Pq C(q)


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Profit Maximization

Each unit of output increases revenues

by the Marginal Revenue

It also increases costs by the Marginal

Cost

MR =(Pq)

q

MC =C

q


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Profit Maximization If MR > MC, profits increase because

revenues rise faster than costs, but if MR MC implies that the value to society

of the last unit of output is greater thanthe cost to society of obtaining it

b) MC AC i.e. production costs per unitare not minimized

2. The monopoly can earn positiveeconomic profits because other firmscannot enter the market


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Monopoly Ex. Suppose a Monopolist faces market demand Q =

600 2P and has a cost function C = 100 + q2 where

MC = 2q . Find the equilibrium price, quantity, and

monopoly profit.


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Monopoly

Depending on the shape of the AC

curve relative to market demand, it may

be beneficial for the monopolist to

produce output at more than one plant

If a firm decides to produce in a multi-

plant setting, it must decide how muchoutput to produce at each plant


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Multi-plant Output Producing one more unit of output increases

revenue by MR and cost by MC so

MR = MC1(Q1)and

MR = MC2(Q2)


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Multi-plant Output

This implies that

MC1(Q1) = MC2(Q2)so that marginal cost is the same at all

plants (makes sense since if one plant

was cheaper than another, you shouldproduce more at the cheap one and

less at the expensive one)


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Multi-plant Output

This DOES NOT imply that output is the

same at both plants. To the extent that

the plants have different cost functions

(and thus different MC functions), output

will vary


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Multi-plant Output Ex. Suppose demand is given by Q = 140 2P . The

Monopolist has two plants, one with MC1 = 3Q1 and

the other with MC2 = Q2 . How much output should be

produced at each plant?


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Social Cost of a Monopoly

The Monopoly will generate a Dead

Weight Loss because P > MC


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Monopolistic Competition

There are no barriers to entry (like

perfect competition)

Each firm sells a differentiated product

so each firm has some discretion over

the price it charges


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Monopolistic Competition Monopolistically

Competitive firms

face a downwardsloping demandcurve and so havea downward sloping

MR curve

They set MR = MC


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Monopolistic Competition

If P > AC , the firm

will earn profits

and new firms willenter the market

until price has

eroded to thepoint where

P = AC


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Notes on Monopolistic Competition

Capital distribution is efficient. P = AC

so no firm is earning economic profits.

There is no advantage to entering orleaving this market

Production is NOT efficient. P > MC so

there is some deadweight loss tosociety. AC > MC so AC is NOT

minimized


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Monopolistic Competition Ex. Suppose a Monopolistically Competitive firm

faces a demand function Q = 160 P and has a Cost

Function C = 3200 + q2 where MC = 2q. What

quantity and price does the firm charge? Would you

expect this firm to face increased competition in the

Long Run?


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Market Structures 2

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