²Unit 4 : Imperfect competition

²Unit 4 : Imperfect competition

Monopoly: Standard oil, electric company

One large firm control the market (the firm is the market). It can be because they are the only one’s producing that good in a town or world.

• Unique product (no close substitutes)
• High barrier (Other firms can’t enter the industry)
• Monopolies are “price MAKERS”

Demand doesn’t equal MR

• As the firm reduces its price the MR gradually decreases; to sell more units a price maker lowers the price of all units, including ones they could have sold for a higher price.

• The MR line is always below the demand curve because as a firm sells a product at a lower price the MR decreases.
• When the MR is at 0, the TR curve reaches its peak.

The left side of MR is Elastic and when MR reaches 0, we have Inelastic because:

• As price goes down, TR goes up🡪 Elastic demand
• As price goes up, TR decreases🡪 Elastic demand
• Price goes down, TR goes down🡪 Inelastic demand
• Price goes up, TR goes up🡪 Inelastic demand

The graph of a Monopoly has: MC, ATC, D and MR

TR= P*Q

Loss per unit: price the unit is being sold at - price of TC

How does the government decide how many public goods to produce ?

Demand for Public goods:

The “Marginal social Benefit” of the good is its usefulness to society and is determined by citizens willingness to pay. (Tax)

Supply of public goods

The Marginal Social Cost of providing each additional quantity.

Produce where MSB=MSC

Market Failure:

1. Public goods: free market can’t produce public good or won’t because there’s no profit in there.
2. Externalities: It’s third person side effect. There are EXTERNAL benefits or external cost to someone other than the original decision maker.

Example: Smoking Cigarettes

• The free market assume that the cost of smoking is fully paid by people who smoke.

Monopolistic Competition

Characteristics

• Relatively large numbers of sellers
• Differentiated products
• Have some control over price (easy for firms to enter and leave)
• Easy entry and exit (low barriers)
• Non price competition (advertising)

Monopolistic competition is made up of prices makers so MR is less than Demand.

Firms produce were MR=MC

This is in the short run

If firms make a loss in the market, they can leave and it will make the demand curve go up

LONG RUN EQUILIBRIUM

Quantity where MR=MC up to price= ATC

As firms enter the market and sell slightly different products, the demand curve will fall until there is no economic profit

Not allocatively efficient because P doesn’t = MC

The price is greater than the MC, so they are causing dead weight loss.

They are also not productively efficient because they are not producing at Min ATC. They are producing less output because they want to maximize profit and get their cost as low as possible.

“Excess capacity” the firms can produce at a lower cost, but it holds back production to maximize profit. Not efficiently using Labor and Capital.

...