Second Edition Chapter 11 Costs and Profit Maximization UnderCompetition Competition.

Second Edition

Chapter 11 Chapter 11 Costs and Profit Maximization Under

CompetitionCompetition

Costs and Profit Maximization Under

CompetitionCompetition

Chapter OutlineChapter Outline

What price to set? What quantity to produce? Profits and the average cost curve Entry, exit, and shutdown decisions Entry, exit, and industry supply curves

2

IntroductionIntroduction

Imagine that you are the owner of a stripper oil well. You must answer three questions:• What price to set?• What quantity to produce?• When to enter and exit the industry?

In this chapter will answer these questions for a competitive industry

3

What Price to Set?What Price to Set?

In a competitive market you are a “price-taker”• As an oil producer your price is the world

price. If you set the price higher, no one will buy your oil. Why would you set the price lower?

Elasticity of demand for your oil is perfectly elastic

Let’s see what this means.

4

What Price to Set?What Price to Set?

World Market for Oil Demand for Your Oil

P ($/barrel)P ($/barrel)

Quantity

(millions of barrels)

Quantity

Demanddemand

Marketsupply

$50

(barrels)

Demandfor your

oil

82

5

The Perfectly Elastic Demand CurveThe Perfectly Elastic Demand Curve

A perfectly elastic demand curve is a reasonable assumption under the following conditions:• Product being sold is similar across sellers.• There are many buyers and sellers, each

small relative to the total market.• There are many potential sellers.

6

The Perfectly Elastic Demand Curve The Perfectly Elastic Demand Curve

Demand curves are most elastic in the long run

Long run – the time after all exit or entry has occurred.

Short run – the time period before exit or entry can occur

7

Try it!Try it!

To next To next Try it! Try it!

In a competitive market, what happens when a firm prices its product above the market price? Below the market price?

What kind of demand elasticity does the competitive firm face?

How can a firm that produces oil face a very elastic demand curve when the demand for oil is inelastic?

What Quantity to Produce?What Quantity to Produce?

We assume the objective is to maximize profit.

Total revenue is price x quantity = P x Q

Total cost is the cost of producing a given quantity of output

9

Profit = = Total Revenue – Total Cost

Don’t Forget: Opportunity Cost!Don’t Forget: Opportunity Cost!

Total cost = Explicit cost + Implicit cost Explicit cost is cost that requires a money

outlay Implicit cost is an opportunity cost that does

not require an outlay of money Economic profit includes implicit costs Accounting profit = Total revenue – explicit

costs Output decisions should be based on

economic profit 10

Maximizing ProfitMaximizing Profit

From now on our measure of total costs includes implicit costs.

• Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC)

• Fixed Costs are costs that do not vary with output (Q)

• Variable Costs are costs that do vary with output (Q)

11


Marginal revenue (MR) = Change in TR from selling one more unit.

Marginal cost (MC) = Change in TC from producing one more unit.

Profits are maximized at the level of output where MR = MC• If MR > MC → ↑profits from ↑Q• If MR < MC → ↓profits from ↑Q

Let’s look at some hypothetical data12

Profit MaximizationProfit Maximization

Let’s show this with our model. 13


P($/barrel)

Quantity(barrels)0 102 3 4 5 6 7 8 91

100

$150

50

0

MR = P

Marginalcost

At Q = 8: P = MR = MCProfits are maximized

WorldMarketprice→

Note: In a competitive market, price does not vary with the firm’s output. This implies:

PΔQ

ΔQP

ΔQ

Q)Δ(P

ΔQ

ΔTRMR

14

Maximizing Profit: Effect of an Increase in Maximizing Profit: Effect of an Increase in the Market Pricethe Market Price

P($/barrel)


100

$150

50

0

MR = P

Marginalcost

As P↑, the firm expands production along its MC curve

WorldMarketprice→ MR = P

15

Profits and the Average Cost CurveProfits and the Average Cost Curve

Average cost is the cost per unit of output, i.e. the total cost divided by Q

We can now add a column to our table showing AC at each level of output.• At the profit maximizing quantity, is AC at its

lowest value?

Q

TCAC

16

Profits and the Average Cost CurveProfits and the Average Cost Curve

Let’s see how profits are measured in our model. 17


P($/barrel)


100

$150

50

0

MR = P

Marginalcost

WorldMarketprice→

AverageCost (AC)

17

P = AR = $50Profits are maximized at Q = 8At Q = 8, AC = $25.75Profit = (P – AC) x Q or,Profit = ($50 - $25.75) x 8 = $194Maximizing profits ≠ minimum AC

25.75

18


P($/barrel)


100

$150

50

0

Marginalcost

AverageCost (AC)

17

MR = MC doesn’t necessarily mean the firm makes a profit

P = $17 is the minimum price the firm will accept

P > $17 → P > AC → Profits P < $17 → P < AC → Losses

Let’s look at this a little closer. 19


P($/barrel)


50

25

0

Marginalcost

AverageCost (AC)

17

Loss

P = MR

P < ACis a profit

P < ACis a loss

20

Try it!Try it!

If a firm is earning positive economic profit, it must be the case that

a)price is less than average cost.

b)price is equal to average cost.

c)price is equal to total cost.

d)price is greater than average cost.


Marginal and Average Cost CurveMarginal and Average Cost Curve

The MC curve intersects the AC curve at its minimum point.• When marginal cost is just below average cost, the AC curve

is falling.• When marginal cost is just above average cost, the AC curve

is rising.• So, AC and MC curves must meet at the minimum of the AC

curve.

Entry, Exit, and Shutdown DecisionsEntry, Exit, and Shutdown Decisions

When should a firm enter or exit an industry?

Long run• Firms will enter the industry when P > AC• Firms will exit the industry when P < AC

When P = AC• Profits are zero• No incentive to either leave or enter the

industry

23

Entry, Exit, and Shutdown DecisionsEntry, Exit, and Shutdown Decisions

Why would firms remain in an industry if profits are zero?

Zero profits – means at the market price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity cost.

When economists say zero profits, they mean what people mean by normal profits.

24

The Short-Run Shutdown DecisionThe Short-Run Shutdown Decision

Sometimes it makes sense to continue running a business even if P < AC.

A ski resort is an example• If it shuts down during the summer…

Revenue = 0, but… They still have fixed costs to cover

• Insurance, security, payments to the bank…

• If it stays open Revenue is positive

• Ski lift for hikers and bikers• Restaurants and hotel

• If TR > VC they are better off staying open

The following table provides some numbers to help us.25

The Short-Run Shutdown DecisionThe Short-Run Shutdown Decision

Note: By staying open, the firm still loses money, but it loses less than if it shuts down for the summer

26

Entry and Exit with Uncertainty and Entry and Exit with Uncertainty and Sunk CostsSunk Costs

In the real world firms must modify the entry and exit rules.• P > AC → Firm should enter only if the price is

expected to be above AC for a long time.• P < AC → Firm should exit only if the price is

expected to below AC for a long time.

Let’s return to our oil firm as an example.

27


Entry means drilling an oil well. Costs of drilling an oil well are sunk costs. Sunk costs – A cost that once incurred can

never be recovered. Unless

• long enough to cover sunk costs, the well won’t be drilled.

($17) ACminPExpectedOil

28


It doesn’t always make sense to exit an industry immediately when P < AC• High entry and exit costs• Long-term it may be best to “weather the

storm”

Only if • For an extended period of time will the firm

exit

($17) ACmin PExpectedOil

29


Firms must base their exit or entry decisions on lifetime expected profit when…• It is costly to enter or exit• There is uncertainty about future prices

Uncertainty about the national economy can cause many firms to reduce investment simultaneously.

30

Entry, Exit, and Industry Supply CurvesEntry, Exit, and Industry Supply Curves

Industry supply curve depends on how costs change as industry output ↑ or ↓• Constant cost industry – Industry costs do not

change with greater output• Increasing cost industry - Industry costs ↑ with

greater output• Decreasing cost industry – Industry cost ↓ with

greater output

We discuss each of these in turn.

31

Constant Cost IndustriesConstant Cost Industries

Domain name registration industry has two characteristics:• Satisfies all the conditions for a competitive

industry• Major input , bank of computers, is small

compared to the world supply of computers.

Implications1)Price is quickly driven down to AC ($6.99).

2)Price doesn’t change much.

Let’s see how this works.32

Constant Cost IndustryConstant Cost Industry

Market FirmPP

qQ

$6.99

SSA

DA

AC

MC

QA qA

A

↑ Market demand → ↑ market price → ↑ profits ↑ profits → Existing firms ↑ q → ↑ Q ↑ profits → Firms enter → Short-run supply shifts right → ↓ P, ↑Q Profits return to normal

$7.99

DB

A

QB qB

SSBBB

C C

QC

LRS

33

Increasing Cost IndustriesIncreasing Cost Industries

Industry costs rise as industry output increases.

The oil industry is an increasing cost industry• Greater quantities of oil can only be obtained

by using more expensive methods Drilling deeper Drilling in more inhospitable spots Extracting oil from tar sands

We can use the following example to illustrate.34


Firm 1 – oil is near the surface Firm2 – oil is located deeper

Firm 2 IndustryFirm 1 P PP

q2 Qq1

MC1 MC2AC2

AC1

$50

$17

$29

4 5 76 8 4 11 15

SIndustry

P < $17 → Q = 0 P = $17 → Q = q1 + q2 = 4 P = $29 → Q = q1 + q2 = 11 P = $50 → Q = q1 + q2 = 15 35


Any industry that buys a large fraction of the output of and increasing cost industry will also be an increasing cost industry.

Three examples:• Gasoline industry - ↑demand for gas → ↑ price

of oil → ↑ price of gas• Electricity - ↑ demand → ↑ demand for coal• Coal – for the same reasons as oil

36

Decreasing Cost Industry: A Special CaseDecreasing Cost Industry: A Special Case

Industry clusters can create decreasing cost industries• As one industry grows, suppliers of inputs

move to be close → ↓ costs• Examples:

Dalton Georgia – “Carpet Capital of the World” Silicon Valley – Computer technology Hollywood – Movies Aalsmeer, Holland – Flower distribution

Cost reductions are temporary37

Try it!Try it!

Is the automobile manufacturing industry a constant cost, increasing cost, or decreasing cost industry? Why?

Where are most U.S. films made? Why do you think the film industry is concentrated in such a small town?


Industry Supply: SummaryIndustry Supply: Summary

Constant cost industry• Industry is small relative to its input markets…• It can expand without ↑ costs → flat supply curve.

(Constant cost industry) Increasing cost industry

• Expansion → ↑ costs → supply curve slopes upward

Decreasing cost industry• Expansion → ↓ costs → supply curve slopes

downward• Rare and temporary

39

TakeawayTakeaway

We answered the following 3 questions• What price to set?: P = market price• What quantity to produce?: P = MC• When to enter and exit an industry?

In the long-run • Enter if P > AC• Exit if P < AC

Increasing cost industry: LRS slopes up Constant cost industry: LRS flat Decreasing cost industry: LRS slopes down

40

Second Edition

End of Chapter 11End of Chapter 11

Second Edition

Chapter 12 Chapter 12 Competition and The InvisibleInvisibleHandHand

Competition and The InvisibleInvisibleHandHand


In this chapter we return to the “invisible hand”

With the right institutions, individuals acting in their self-interest can generate outcomes that…• are neither part of their intention nor design.• have desirable properties.

43


Invisible Hand Property 1:The minimization of total industry costs of production

Invisible Hand Property 2: The balance of industries

Creative destruction The invisible hand works with

competitive markets44


We will show that:• Competitive markets balance production

across firms in a given industry so that… total industry costs are minimized.

• Entry (P > AC) and exit (P < AC) result in balanced production across different industries so that… Total value of production is maximized.

45

Invisible Hand Property 1: The Minimization ofInvisible Hand Property 1: The Minimization ofTotal Industry Costs of ProductionTotal Industry Costs of Production

In a competitive market with N firms…• All firms face the same market price• To maximize profits each firm adjusts its

output until P = MC

Therefore, the following will be true:

This results in minimizing total costs for the industry

N21 MC...MCMCP

46

To see how, lets use an example


Assume:• You own two farms.• Each has a different MC curve.• You wish to produce a total of 200 bushels of

wheat.

You should produce all 200 bushels on the farm with the lowest MC. Right?

Not necessarily.

47

To see why, lets use a diagram.


48

$$

Bushelsof corn

Bushelsof corn

Farm 2Farm 1

200200

MC2

MC1

Total cost of producing 200 bushels on farm 2

Total cost of producing 200 bushels on farm 1

It costs less to produce all 200 bushels on farm 2.

Net result: ↓total cost of producing 200bushels


49

$$

Bushelsof corn

Bushelsof corn

200

MC2

MC1

What if we produce a little less on farm 2 and a little more on farm 1?

↑ Cost due to producingMore on farm 1

↓ Cost due to producingless on farm 2


50

$$

Bushelsof corn

Bushelsof corn

200

MC2

MC1

Only when MC1 = MC2 is it not possible to reallocate production and reduce costs.

75 125

Less

More

MC


Summary:

• If MC1 > MC2 → ↓Q1, ↑Q2 → ↓ Total Costs

Costs saved by ↓Q1 > costs increased by ↑Q2

• If MC1 < MC2 → ↑Q1, ↓Q2 → ↓Total Costs

Costs increased by ↑Q1 < costs saved by ↓Q2

• If MC1 = MC2 → Total costs are minimized.

Costs increased by ↑Q1 = Costs decreased by ↓Q2

Costs increased by ↓Q1 = Costs decreased by ↑Q2

51


The “really important part”:

• As owner of the farms you can allocate your production across farms so that MC1 = MC2.

• What if the farms are owned by different people in different states? Each farmer faces the same market price.

Each maximizes profits by producing where: P = MC

Therefore, P = MC1 = MC2

52

Invisible Hand Property 2: The Balance Invisible Hand Property 2: The Balance of Industriesof Industries

Entry or exit work to ensure that…• Labor and capital move across industries

• Production is optimally balanced

• Greatest use is made of our limited resources.

It is possible to minimize the cost of producing any given level of output but…

To minimize cost across industries:• Each industry should produce the “right” quantity.

• Invisible Hand Property 2 makes this happen.

53Let’s see how markets do this.

Invisible Hand Property 2: The Balance Invisible Hand Property 2: The Balance of Industriesof Industries

Profit is the signal that allocates capital and labor among industries.• They need to flow from low-profit industries to

high industries. If P > AC, profits are above normal.

• Capital and labor enter the industry. If P < AC, profits are below normal.

• Capital and labor exit the industry.

Profit rate in all competitive industries tends toward the same level.

54

Creative DestructionCreative Destruction

Elimination Principle – above-normal profits are eliminated by entry, and below-normal profits are eliminated by exit.• Resources move toward an increase in the value

of production.• Entrepreneurs move resources from unprofitable

industries to profitable industries. Implication of this principle:

• Above normal profits are temporary.• To earn above-normal profits, entrepreneurs must

innovate.

55

Creative DestructionCreative Destruction

Joseph Shumpeter (1883-1950)• “This process of creative

destruction is the essential fact about capitalism”

• The kind of competition that counts: “…the new commodity,

56

the new technology, the new source of supply, the new type of organization…which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives”

The Invisible Hand Works with The Invisible Hand Works with Competitive MarketsCompetitive Markets

The invisible hand will not work if…• Prices do not accurately signal costs and

benefits. Result: no optimal balance between industries

• Markets are not competitive. Result:

• Monopolists and oligopolists produce less than the ideal amount

• Firms make above normal profits, and entry is limited.

• Commodities are public goods. Result: Self interest does not align with social

interest

57

TakeawayTakeaway

Invisible Hand Property 1• P = MC results in minimization of total industry

cost. Invisible Hand Property 2

• Entry and exit result in the best use of limited resources.

Elimination principle• Above normal profits are temporary. • To earn above normal profits, a firm must

innovate

58

Second Edition


Second Edition

Chapter 13 Chapter 13

MonopolyMonopoly


Market Power How a Firm Uses Market Power to Maximize

Profit The Costs of Monopoly: Deadweight Loss The Costs of Monopoly: Corruption and

Inefficiency The Benefits of Monopoly: Incentives for

Research and Development Economies of Scale and the Regulation of

Monopoly Other Sources of Market Power

61


Price of one pill is about 25 times higher than cost. Why?• Market power

In the U.S, deaths from AIDS dropped by 50% due to drugs like Combivir.

AIDS has killed more than 28 million people.

62

• The “you can’t take it with you” effect• The “other people’s money” effect

Market PowerMarket Power

Market Power – the power to raise price above marginal cost without fear that other firms will enter the market.

GlaxoSmithKline owns the patent on Combivir.• Monopoly – a firm with market power.

A simple test:• India does not recognize the patent• Price of the drug in India = $0.50 per pill = MC.

63

Sources of market power:• Patents• Government regulations other than patents• Economies of scale• Exclusive access to an important input• Technological innovation

We look at these later

64

Market PowerMarket Power

Marginal revenue (MR) – the change in total revenue from selling an additional unit of output.

Marginal cost (MC) – the change in total cost from producing an additional unit.

To maximize profit, firms produce at the level of output where:

65

How a Firm Uses Market Power to How a Firm Uses Market Power to Maximize ProfitMaximize Profit

MCMR

Firm with market power:• Faces a downward sloping demand curve.• If it sells an additional unit…

It had to lower the price. Additional revenue per unit < current price.

In other words:

66


PMR

Let’s show this.

MR < PMR < P

Price

Quantity2 3 4 6 751

$20

18

16

14

12

10

8

6

4

2

Demand

MR

Revenue loss = $2 x 2 = $4

At P = 16:•TR = $16 x 2 = $32At P = 14:•TR = $14 x 3 = $42Marginal Revenue equals:•Revenue loss = - $4 +•Revenue gain = $14 x 1 = $14MR = $14 -$4 = $10

RevenuegainMR

=$10

67

Short-Cut for Finding MRShort-Cut for Finding MR

MR begins at same point on the vertical axis. MR has twice the slope

68

Price

Quantity

a

P = a – bQMR = a – 2bQ

MR Demand

a/ba/2b

Let’s lookat someexamples.

Short-Cut for Finding MRShort-Cut for Finding MR

Short-cut for finding MR

69

PricePrice

aa

500 250 QuantityQ

250 125

DemandDemandMRMR

The value of Q where MR= 0 is one half of that where P = 0.


Quantity(millions of pills)

Price($/pill)

MR

Demand

AC

MC

Profit maximizing output = 80Profit maximizing price = $12.50Profit per pill = $10.00Total profit = $10 x 80 = $800 m

80

$12.50

0.50

2.50

Profit

//

70

The Elasticity of Demand and the The Elasticity of Demand and the Monopoly MarkupMonopoly Markup

The two effects can make the elasticity of demand for pharmaceuticals more inelastic:• The “you can’t take it with you” effect

People with serious illnesses are relatively insensitive to the price of life saving medicine.

• The “other people’s money” effect If third parties are paying for the medicine, people

are less sensitive to price.

71

Let’s see how this effects the monopoly markup.

The Elasticity of Demand and the The Elasticity of Demand and the Monopoly MarkupMonopoly Markup

72

PricePrice

QuantityQuantity

Demand

MRMR

Demand

MCMC

Relatively inelastic demandbig markup

Relatively elastic demandsmall markup

QI

PI

QE

PE

Largemarkup

Smallmarkup

Try it!Try it!

As a firm with market power moves down the demand curve to sell more units, what happens to the price it can charge on all units?

What type of demand curve does a firm with market power prefer to face for its products: elastic or inelastic? Why?


The Cost of Monopoly: Deadweight LossThe Cost of Monopoly: Deadweight Loss

Compared to competition monopolies reduce total surplus (CS+ PS)

This implies a deadweight loss. Let’s use a model of a constant cost

industry to show this.

74

Because the profit maximizing monopolist will produce where:

And because P > MR:

Result: deadweight loss (inefficiency)

75


MCP

MCMR

To show this we will use the monopoly model.


76

PP MonopolyCompetition

QC = Optimalquantity

PC

Monopolist gets this

Supply

MR

Demand Demand

MC = AC

PM

QC

CS

QM

Profit

Consumers getthis

DWL

No one gets this(deadweight loss)

QQ

Consumers getthis

P > MCP = MC


Deadweight loss in practice• GlaxoSmithKline prices Combivir at $12.50 a

pill• MC = $0.50• Deadweight loss = value of the sales that do

not occur because P > MC.

77

The Costs of Monopoly: Corruption and The Costs of Monopoly: Corruption and InefficiencyInefficiency

In Indonesia Tommy Suharto, the presidents son, was given the clove monopoly.

He bought the entireLamborghini company with his monopoly profits.

78

Many monopolies are born of government corruption

The Costs of Monopoly: Corruption and The Costs of Monopoly: Corruption and InefficiencyInefficiency

Monopolies are especially harmful if they control a good that is used to produce other goods.

In Algeria a dozen or so army generals each control a key good• People refer to these men as General wheat,

General tire….• Each general tries to get a larger share of the

economic pie. Result: greater DWL and the “pie” shrinks

79

The Benefits of Monopoly: Incentives for The Benefits of Monopoly: Incentives for Research and DevelopmentResearch and Development

Drug prices are lower in India and Canada• India does not offer strong patent protection.• Canada’s government controls drug prices.

Should the U.S. government limit patents?• It costs $1billion to develop a new drug.• Patents are one way of rewarding R&D.• Without patents why would firms spend on

R&D?• Result: Fewer new drugs will be developed.

80


What the U.S. government opened up the pharmaceutical industry to competition?

81

Competition will drive price down to MC.• R&D costs are not

included in MC• Firms can not cover

their R&D costs.• Result: Fewer drugs will be created.


Other goods have high development costs.• Information goods – goods that are valuable for

their content. Examples: Music, movies, computer files, books. Typically MC is very low.

• High development costs and low MC of production → Need for patent or copyright protection.

Policy trade-off:• Lower prices today

• Fewer new ideas in the future

82


Nobel Prize winner Douglas North, economic historian:

“The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.”

83

Patent Buyouts: A Potential SolutionPatent Buyouts: A Potential Solution

The government could buy the patent for a little more than monopoly profits … then rip it up.

Competitors would enter and drive the price of the drug to its MC.

What’s the downside?• Higher taxes – they also create DWL• Difficulty in determining the right price• Possible corruption

84

Economies of Scale and the Regulation Economies of Scale and the Regulation of Monopolyof Monopoly

Economies of scale – the advantages of large-scale production that reduce AC as quantity increases.

Natural monopoly – is said to exist when a single firm can supply the entire market at a lower cost than two or more firms.

85

Let’s use a model to learn the economics of natural monopoly.

Natural MonopolyNatural Monopoly

86

P

Quantity

MR

Demand

Competitiveprice PC

Averagecosts forsmall firms

AC

MC

QC Competitivequantity

QM

PM

Monopolyquantity

Monopolyprice

Optimalquantity

It is possible for PM < PCIf economies of scale are large enough

Natural MonopolyNatural Monopoly

A price control can increase output. What price should the government choose?

• P = MC → Optimal level of output At P = MC, P < AC due to economies of scale The firm’s profit is less than the normal level.

• P = AC, is a compromise Profits are normal There is a deadweight loss.

Let’s go to our model to take a closer look.

Price Control and Natural MonopolyPrice Control and Natural Monopoly

88

P

Quantity

MR

Demand

Competitiveprice PC


AC

MC


QM

PM

Monopolyquantity

Monopolyprice

Optimalquantity

If the government sets:•P = MC

Firm loses money

Loss if P = MC

Price Control and Natural MonopolyPrice Control and Natural Monopoly

89

P

Quantity

MR

Demand

Competitiveprice PC


AC

MC


QM

PM

Monopolyquantity

Monopolyprice

Optimalquantity

If the government sets:P = AC

• Profit = normal• Results in DWL

P = AC

Electric ShockElectric Shock

Government ownership is another solution to natural monopoly.

Worked well until 1970s when new technologies reduced average costs at small scales.

Result: Electric generation

was no longer a natural monopoly. 90

California’s Perfect StormCalifornia’s Perfect Storm

California deregulated wholesale electricity prices in 1998.

Problems: • Transmission and distribution remained natural

monopolies.• Electricity is difficult to store.• Booming economy required importing electricity from

other states.• Inelastic demand curves

Summer-winter 2008• Several factors quadrupled wholesale prices• Generators of electricity could exploit market power.

91

Other Sources of Monopoly PowerOther Sources of Monopoly Power

Barriers to entry – factors that increase the cost to new firms of entering an industry.

92

Try it!Try it!

Consider ticket prices at major league baseball and professional football parks. How does the term “barrier to entry” help explain their pricing?

How permanent are barriers to entry in the following cases: NBA basketball franchises, U.S. Postal Service delivery of first class mail, U.S. Postal Service delivery of parcels?


TakeawayTakeaway

You should be able to:

• Find MR given either a demand curve or a table of prices and quantities.

• Given demand and MC curves, find and label monopoly price and quantity, and DWL.

• With the addition of the AC curve Find and label monopoly profit

Demonstrate that the markup of price over MC is larger the more inelastic the demand.

94

TakeawayTakeaway

Monopolies involve trade-offs between DWL and innovation.

Natural monopolies involve trade-offs between DWL and economies of scale.

Regulation of monopolies is a challenge• Regulation of Cable TV kept prices low but also

quality• Deregulation of electricity in California left them at

the mercy of firms with market power. Many monopolies are created to transfer

wealth to politically powerful elites.95

Second Edition


Second Edition Chapter 11 Costs and Profit Maximization UnderCompetition Competition.

Documents

Transcript of Second Edition Chapter 11 Costs and Profit Maximization UnderCompetition Competition.