1. Chapter 8: Economics of Big Business

2. Market Structure Perfect Competition Monopoly Monopolistic Competition
Oligapoly
Monopoly

3. Degree of Market Power Concentration Ratio
percentage of the market sale by the largest four (or eight) firms
CR > 0.70 indicates significant market power

4. Perfect Competition Many buyers and many sellers Homogeneous product
No barriers to enter the market
Firms are price takers:
Market price is set by D & S
Firms produce all they can at the market price

5. Profit Maximization
Business firms try to make the highest possible profit
Profit = Total Revenue – Total Cost
Profit is maximized when MC = MR
MC = additional cost of producing an extra unit
MR = additional revenue from selling an extra unit

6. Price-Taker Firms: P=MR=MC
Market S D
S = MC
D = MR P P
MC=MR S D q Q
Quantity
Quantity

7. Monopoly Many buyers, but only one seller
Product maybe unique or differentiated
Barriers to enter the market
Firms are price-makers, facing the market demand

8. Reasons for Monopoly Control the supply of raw materials
Investment / R&D requirements
Government licensing
Natural Monopoly

9. Price-Maker Firms: P>MC=MRD MC P
MC=MR MC D MR
Quantity Q

10. Perfect Competition vs. Monopoly
Monopoly price is higher than the competitive price
Monopoly output is lower than the competitive output
Since monopoly causes resource misallocation it is outlawed by the Anti Trust Law

11. Price-Output Comparison
Pc = competitive price
Qc = competitive output
Pm = monopoly price
Qm = monopoly output
Pm>Pc but Qm<Qc
Price D
Dead Weight Loss=ABC MC A
P=MC Pm C Pc
MC=MR B D MR
Quantity Qm Qc

12. Natural Monopoly
A firm that experiences “economies of scale” so that it operates with a declining average cost
It is less costly to have one large firm than several small firms
Government permits natural monopoly, but regulates its price to minimize the DW-loss

13. Long-run Average Cost $ Cost 4 1 25 100 Quantity Diseconomies of scale