Chapter 5: Competition and Monopoly: Virtues and Vices

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Presentation transcript:

Chapter 5: Competition and Monopoly: Virtues and Vices Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 5: Competition and Monopoly: Virtues and Vices

Market equilibrium facing competitive firm Perfect Competition Market equilibrium facing competitive firm Price Market supply Market demand Carbaugh, Chap. 5

Demand and revenue for a competitive firm Perfect Competition Demand and revenue for a competitive firm Demand and Marginal Revenue for one company Total revenue $ $ Total revenue Demand = P = MR 7 1 Carbaugh, Chap. 5

Short-run economic profit/loss for a competitive firm Perfect Competition Short-run economic profit/loss for a competitive firm Profit maximization Loss minimization $ $ MC Total loss = $2,128 MC Demand= P = MR A ATC ATC 5.33 AVC Total profit = $2,500 Demand= P = MR 700 1600 Carbaugh, Chap. 5

Short-run supply curves for a competitive firm and market Perfect Competition Short-run supply curves for a competitive firm and market Individual firm’s supply curve Market supply curve $ $ Firm’s short-run supply curve Market’s short-run supply curve MC Supply AVC 700 1600 700,000 1,600,000 Carbaugh, Chap. 5

Long-run adjustments for a competitive firm: effects of market entry Perfect Competition Long-run adjustments for a competitive firm: effects of market entry Market Individual firm Price S0 Price and cost S1 Demand0 = Price0 LRATC A Demand1 = Price1 D0 500 Carbaugh, Chap. 5

Long-run adjustments for a competitive firm: effects of market exit Perfect Competition Long-run adjustments for a competitive firm: effects of market exit Market Individual firm Price S1 Price and cost LRATC S2 A Demand1 = Price1 Demand2 = Price2 D0 500 Carbaugh, Chap. 5

Economies of scale and natural monopoly Hypothetical electric utility’s cost curve B A ATC Carbaugh, Chap. 5

Price and marginal revenue for a monopolist Monopoly Price and marginal revenue for a monopolist Demand and revenue schedules for a monopolist $ Quantity Price Total Marginal (dollars) Revenue Revenue 0 4,000 0 0 1 3,600 3,600 3,600 2 3,200 6,400 2,800 3 2,800 8,400 2,000 4 2,400 9,600 1,200 5 2,000 10,000 400 6 1,600 9,600 -400 Demand = Price MR Carbaugh, Chap. 5

Profit maximization/loss minimization for a monopolist Monopoly Profit maximization/loss minimization for a monopolist Profit maximization Loss minimization $ $ Losses = $1,600 Profits = $3,200 MC A MC ATC A ATC AVC B C B Demand = Price Demand = Price MR MR Carbaugh, Chap. 5

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