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Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about every concept would be too boring. Speed Reviewing.

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Presentation on theme: "Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about every concept would be too boring. Speed Reviewing."— Presentation transcript:

1

2 Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about every concept would be too boring. Speed Reviewing will help you identify what you need to study. So you must come see me about specific things you dont understand.

3 Unit IV: Imperfect Competition Half Way

4 Imperfect Competition 1. The cost curves are the same 2. The MR= MC rule still applies 3. Shut down rule still applies 4. All have a downward sloping demand curve. To sell more a firm must lower its price. 5. All are inefficient. 6. MR < Demand

5 Characteristics of Monopolies

6 5 Characteristics of a Monopoly 5 Characteristics of a Monopoly 3. Price Maker 2. Unique good with no close substitutes The firm can change the price by changing the quantity it produces The Firm IS the Industry 1. Single Seller 4. High Barriers to Entry New firms CANNOT enter market No immediate competitors 5. Some Nonprice Competition

7 Drawing Monopolies

8 P Q $ D MR MR is below Demand

9 PQdTRMR $1100- Why is MR less than Demand?

10 $10 PQdTRMR $110-- $10110 Why is MR less than Demand?

11 $10 PQdTRMR $110-- $10110 $92188 Why is MR less than Demand? $9

12 $10 PQdTRMR $110-- $10110 $92188 $83246 Why is MR less than Demand? $9 $8

13 $10 PQdTRMR $110-- $10110 $92188 $83246 $74284 Why is MR less than Demand? $9 $8 $7

14 $10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 Why is MR less than Demand? $9 $8 $7 $6 $7 $6

15 $10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 $56300 Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5

16 $10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 $56300 $ Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 $4

17 $10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 $56300 $ Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 $4

18 $10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 $56300 $ Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 $4 MR IS LESS THAN PRICE

19 Elastic vs. Inelastic Range of Demand Curve

20 P Q $ D MR Elastic and Inelastic Range

21 Dollars $ $ Q Q Elastic and Inelastic Range

22 Dollars $ $ MR Elastic D Q TR Q Total Revenue Test If price falls and TR increases then demand is elastic.

23 Q Dollars $ $ TR MR D Inelastic Range Elastic Range Q Elastic and Inelastic Range Total Revenue Test If price falls and TR falls then demand is inelastic. When MR goes negative, TR will fall Total Revenue Test If price falls and TR increases then demand is elastic.

24 Putting Demand, MR, and Cost Together

25 D MC ATC MR Profit =$5 MR = MC Rule Still Applies Q Price, costs, and revenue $ How much is the TR, TC and Profit or Loss?

26 D MC ATC MR 140 Loss Q Price, costs, and revenue AVC Q How much is the TR, TC, and Profit or Loss?

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28 Monopolies and Efficiency

29 Monopolies are inefficient because they… 1.Charge a higher price 2.Under produce Not allocativly efficiency 3.Produce at higher costs No productive efficiency 4.Have little incentive to innovate

30 Q EFFICIENCY OF PERFECT COMPETITION P D S = MC PcPc QcQc An industry in pure competition MB=MC CS PS

31 Q INEFFICIENCY OF PURE MONOPOLY P D MR S = MC PcPc PmPm QcQc QmQm At MR=MC A monopolist will sell less units at a higher price than in competition

32 Q CS and PS of a Monopoly P D MR S = MC PcPc PmPm QcQc QmQm Result is DEADWEIGHT LOSS to society CS PS

33 D MC MR Q Price, costs, and revenue Are Monopolies Productively Efficient? Does Price = Min ATC? ATC No. They are not producing at the lowest cost (min ATC)

34 D MC MR Q Price, costs, and revenue Do Monopolies Have Allocative Efficiency? Does Price = MC? ATC No. Price is greater. The monopoly is under producing.

35 Regulating Monopolies

36 How do they regulate? Price controls: Price Ceilings Why Regulate? Why would the government regulate an monopoly? 1.To keep prices low 2.To make monopolies efficient

37 1.Socially Optimal Price P = MC (Allocative Efficiency) Where should the government place the price ceiling? 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit) NOT THE SAME AS PRODUCTIVE EFFICIENCY OR

38 Q D MR MC ATC P Price and Costs Monopoly Price MR = MC QmQm PmPm REGULATED NATURAL MONOPOLY

39 Q D MR MC ATC P Price and Costs Fair-Return Price Normal Profit Only QfQf PfPf TR = TC REGULATED NATURAL MONOPOLY

40 Q D MR MC ATC P Price and Costs Socially-Optimum Price P = MC QrQr PrPr REGULATED NATURAL MONOPOLY

41 Price Discrimination

42 Requires the following conditions: Firm must have monopoly power Firm must be able to segregate the market Consumers must not be able to resell product PRICE DISCRIMINATION Definition: Practice of selling the same products to different buyers at different prices

43 Q D MC ATC P Q1Q1 Price and Costs Q2Q2 A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MR=D

44 Q D MC ATC P Price and Costs What output do they make? Where is Consumer Surplus? Q2Q2 MR=D

45 Q D MC ATC P Price and Costs Profit with price discrimination Where is the Profit? Q2Q2 MR=D

46 Why does MR equal Demand?

47 $10 PQdTRMR $110-- $10110 $92199 $83278 $74347 $65366 $56355 $47394 Why does MR equal Demand? $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4

48 Whats the Point? Perfectly price discriminating firms: Make more profit Produce more Produce at allocative efficiency

49 Monopoly Practice FRQ

50 Monopolistic Competition

51 Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Monopolistic Competition: Relatively Large Number of Sellers Differentiated Products Some control over price Easy Entry and Exit Non-price competition (Advertising)

52 Examples: 1. Fast Food Restaurants 2. Furniture companies 3. Jewelry stores 4. Hair Salons 5. Clothing Manufacturers Differentiated Products Goods are NOT identical. Firms seek to capture a piece of the market by making unique goods. Since these products have substitutes, firms use NON-PRICE Competition

53 Monopolistic Qualities Control over price of own good due to differentiated product. D > MR Plenty of non-price competition Not efficient Monopolistic +Competition Perfect Competition Qualities Large number of smaller firms Relatively easy entry and exit Zero Economic Profit in Long-Run since firms can enter.

54 Drawing Monopolistic Competition

55 D MR $4 ATC Price and Costs Q1Q1 Short-Run Economic Profits What Happens? PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION $2 MC Quantity

56 $4 $2 D MR ATC Price and Costs Q1Q1 New Firms Enter Quantity MC Short-Run Economic Profits PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION

57 D MR $4 ATC Price and Costs Q1Q1 Normal Profit $2 MC $1 LONG- RUN EQUILIBRIUM Quantity

58 D MR $7 Price and Costs Q1Q1 Short-Run Economic Loss What happens? MC $1 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION ATC Quantity

59 D MR MC ATC Price and Costs Q3Q3 Quantity Long-Run Equilibrium Normal Profit Only PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION $7

60 MONOPOLISTIC COMPETITION AND EFFICIENCY

61 MONOPOLISTIC COMPETITION AND EFFICIENCY Not Productively Efficient Minimum ATC Not Allocatively Efficient Price MC Firm has Excess Capacity Graphically…

62 Excess Capacity The gap between the minimum ATC output and the profit maximizing output Given current resources, the firm can produce at minimum ATC, but they decide not to. MONOPOLISTIC COMPETITION AND EFFICIENCY

63 D MR MC P 3 = A 3 ATC Price and Costs Q3Q3 Quantity Long-Run Equilibrium Excess Capacity MONOPOLISTIC COMPETITION AND EFFICIENCY

64 Oligopoly

65 Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Oligopoly: A Few Large Producers Identical or Differentiated Products Mutual Interdependence Firms use Strategic Pricing High Entry Barriers Examples: Cereal Companies, Car Producers

66 Oligopolies occur when only a few large firms start to control an industry. High barriers to entry keep others from entering. Types of Barriers to Entry Economies of Scale High Start-up Costs Ownership of Raw Materials HOW DO OLIGOPOLIES OCCUR?

67 Game Theory

68 What is game theory? The study of how people behave in strategic situations A thorough understanding of game theory helps firms in an oligopoly maximize profit.

69 OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15

70 High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Greatest Combined Profit if both Sell High OLIGOPOLY BEHAVIOR

71 High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Each firm recognizes that more profit is made if they lower price OLIGOPOLY BEHAVIOR

72 High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 BUT if both lower price they end up in the Worst Case OLIGOPOLY BEHAVIOR

73 High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 To make more profit, firms may try to cooperate (collude) OLIGOPOLY BEHAVIOR

74 High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 OLIGOPOLY BEHAVIOR To make more profit, firms may try to cooperate (collude)

75 High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 But now each firm has the incentive to cheat. OLIGOPOLY BEHAVIOR

76 What did we learn? 1.Oligopoly pricing must be strategic 2.Oligopolies have a tendency to collude to gain profit. (Collusion is the act of cooperating with rivals in order to rig a situation.) 3.Collusion results in the incentive to cheat.

77 Oligopoly Graph

78 Not one standard model because there are colluding Oligopolies and noncolluding Oligopolies

79 Colluding Oligopoly

80 A cartel is a group of producers that create a formal agreement to fix prices high. Cartel = Colluding Oligopoly CARTELS AND COLLUSION 1.Cartels set price and output at an agreed upon price 2.Firms require identical or highly similar demand and costs 3.Cartel must have a way to punish cheaters 4.Together they act as a monopoly

81 Colluding Oligopolists Will Split the Monopoly Profits. D MC ATC MR Economic Profit MR = MC Price and costs Q0Q0 P0P0 A0A0 CARTELS AND OTHER COLLUSION

82 Non Colluding Oligopoly

83 1. Match price- If one firm cuts its prices, then the other firms follow suit causing inelastic demand Kinked Demand Curve Model Noncollusive firms are likely to react to competitors pricing in two ways: 2. Ignore change- If one firm raises prices, others maintain same price causing elastic demand

84 D1D1 MR 1 Quantity KINKED DEMAND THEORY: Price The demand and MR curves if other firms match lower pricing If this firm lowers its price and others follow, Qd will increase mildly

85 MR 2 D2D2 Quantity KINKED DEMAND THEORY: Price The demand and MR curves if other firms ignore higher pricing If this firm increases its price and others ignore it, Qd for this firm will decrease significantly

86 MR 2 D1D1 D2D2 MR 1 Quantity Two sets of curves based on the pricing decisions of other firms Price The firms demand and marginal revenue curves

87 MR 2 D1D1 D2D2 MR 1 Quantity Price Rivals tend to follow a price cut Two sets of curves based on the pricing decisions of other firms

88 MR 2 D1D1 D2D2 MR 1 Quantity Price Rivals tend to follow a price cut or ignore a price increase Two sets of curves based on the pricing decisions of other firms

89 MR 2 D1D1 D2D2 MR 1 Quantity Effectively creating a kinked demand curve Price Two sets of curves based on the pricing decisions of other firms

90 D Quantity Effectively creating a kinked demand curve Price Two sets of curves based on the pricing decisions of other firms

91 MR 2 D1D1 D2D2 MR 1 Quantity What about MR? Price Two sets of curves based on the pricing decisions of other firms

92 D MR 1 Quantity Since we use sections of both MR curves, the MR has a vertical gap. Price MR 2 Two sets of curves based on the pricing decisions of other firms

93 D Quantity Profit maximization MR = MC occurs at the kink. KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MR 2 MR 1

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