Characteristics of Perfect Competition:  Numerous small firms and customers. Firms have insignificant market share.  Homogeneity of Product. Firms produce perfect substitutes.  Freedom of Entry and Exit.  Perfect Information.

Demand Facing a Typical Firm in Perfect Competition D S Industry A representative Firm QQ 0 0 Q0Q0 P0P0 P = MR P0P0

MC ATC AVC 0 P a q Fig. A c b

Normal Profit: The entrepreneur’s opportunity cost. It is equal to or greater than the maximum income an entrepreneur could have received employing his or her resources elsewhere. Normal Profit is included in the firm’s costs. Economic Profit: Profit that an entrepreneur makes over the Normal Profit.

P=20MR=MC, at Q=2000 Total Explicit Cost = 10,000 Opportunity Cost = 22,000 TC = Total (Economic) Cost =Explicit Cost + Implicit Cost Economic Profit = TR -TC TR = P x Q = 20(2000) = 40,000 TR –TC = Accounting Profit =30, ,000 =8,000 Economic Profit =40, ,000

Exercises: AVC ATC MC

Exercises: AVC ATC 0 MC

Long Run Equilibrium under Perfect Competition IndustryRepresentative Firm 0 0 D S0S0 P0P0 P0P0 Q0Q0 a q0q0 b c S*S* P*P* Q*Q* q*q*

Monopoly: This is a situation where a single producer (firm) is the sole producer of a good that has no close substitutes.

Sources of Monopoly:  The firm may control the entire supply of raw materials required to produce that output.  The firm may have a patent or copyright.  The case of “Natural Monopoly”. Economies of Scale may permit only one firm to be efficient in the market.

D ATC 0 P Q Natural Monopoly

Sources of Monopoly:  The firm may control the entire supply of raw materials required to produce that output.  The firm may have a patent or copyright.  The case of “Natural Monopoly”. Economies of Scale may permit only one firm to be efficient in the market.  The case of Government Franchises.  Through Mergers and Acquisitions.

Characteristics of Monopoly:  A single seller: A single firm produces all industry output. The monopoly is the industry.  Blockaded entry: Firms are heavily restricted from entering the industry.  Imperfect dissemination of information: Cost, price, and product quality information are withheld from uninformed buyers.

TR 2 =AR 2 =8=P TR 3 =AR 3 =7=P MR 3 = 0 D or AR MR 8(2)=16 7(3)=21 TR 3 -TR 2 =21-16=5 Price Quantity

AVC ATC MC MR D P Q0 b c a Quantity Price

ATC AVC MC MR D Q0 a Quantity Price P c b

ATC AVC MC MRD 0 a Q P Quantity Price c b n m

Find the Profit maximizing output from the following information. Demand InformationCost Information PQ QTC TR MR MC Profit = TR – TC = 32 – 19 = 13

Monopolistic Competition: It is a form of market organization in which there are many sellers of a heterogeneous or differentiated product, and entry into and exit from the industry are rather easy in the long run. Differentiated Product: Products which are similar but not identical and satisfy the same basic need.

Characteristics:  Large number of buyers and sellers.  Product Heterogeneity.  Free Entry and Exit.  Perfect dissemination of information.

23 Gottheil 2e Comprehensive (Exhibit 10.2), Micro (Exhibit 10.2), Macro (Exhibit —) ©2000 South-Western College Publishing The Market Structure Spectrum 50

24 Gottheil 2e Comprehensive (Exhibit 10.6), Micro (Exhibit 10.6), Macro (Exhibit —) ©2000 South-Western College Publishing The Demand Curve for Coca-Cola: Before and After Substitutes Appear on the Market 53 e = -1e = -. 47e = - 3

MC MR D P q0 a b c Quantity Price s r q1q1 D1D1 MR 1

P q0 a Quantity Price D2D2 MR 2 MC

27 Gottheil 2e Comprehensive (Exhibit 10.7), Micro (Exhibit 10.7), Macro (Exhibit —) ©2000 South-Western College Publishing The Effect of Advertising on the Firm’s Demand Curve 54