Cost Curves To Master

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Cost Curves To Master

• Pure Competiton
• Monopoly
• Oligopoly
• Monopolistic Competition

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• Marginal Revenue/Price

12
C
11
D
b
10
E
9
c
F
8
G
Demand ( price)
7
d
6
5
e
4
3
f
Marginal revenue
2
1
g
0
1
2
3
4
5
6
7
8
9
10
QUANTITY (baskets per hour)
10
P
As price decreases from 142 to 132...
but revenue will increase with
the additional unit sold.
MR will Be less than P 132-30 102 MR
Loss 30
D
Gain 132
Q
1 2 3 4 5 6
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As price decreases from 142 to 132...
but revenue will increase with
the additional unit sold.
Loss 30
D
Gain 132
Q
1 2 3 4 5 6
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PRICE DISCRIMINATION
A perfectly discriminating monopolist has
MRD, producing more product and more profit!
MC
P
ATC
Price and Costs
MRD
D
Q
Q1
Q2
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MC
Economic profits with price discrimination
P
ATC
MRD
D
Q
Q1
Q2
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Regulated Monopolies
P
MR MC
Socially optimum Is supposed to be Allocative
efficiency
Fair-Return Price
Pm
Socially-Optimum Price
ATC
Pf
MC
Pr
D
MR
Q
Qm
Qf
Qr
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The Benefits of Cheating on the Cartel Agreement I

• The situation for a representative firm of a
  cartel in long-run competitive equilibrium, it
  produces q1 and charges P1, earning zero economic
  profits.
• As a consequence of the cartel agreement, it
  reduces output to qCC and charges PC.
• Its profits are the area CPCAB.
• If it cheats on the cartel agreement and others
  do not, the firm will increase output to qCC and
  reap profits of FPCDE.

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Maximizing Oligopoly Profits
Industry marginal cost
Industry average cost
Profit- maximizing price
Market demand
Profits
Average cost at profit- maximizing output
J
Industry marginal revenue
Profit-maximizing output


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• Because of the industry-wide excess capacity in
  monopolistic competition, each firm is producing
  at a rate of output that is less than its
  minimum-ATC output rate.

Note the less Efficient production Of Mono Comp
from Perfect Comp
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The gap in MR curve creates a cost cushion If
MC rises or falls within that gap, the
profit-maximizing rate of output MCMR is
unchanged.
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Equilibrium in Monopolistic Competition
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PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
MC
Expect New Competitors
ATC
P1
A1
Price and Costs
Short-Run Economic Profits
D
MR
Q1
Quantity
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PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
MC
ATC
A2
P2
Short-Run Economic Losses
Price and Costs
D
MR
Q2
Quantity
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PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
MC
Long-Run Equilibrium
Normal Profit Only
ATC
P3 A3
Price and Costs
D
MR
Q3
Quantity
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• Graph A shows short-run profits when there are
  few firms in the market
• Graph B shows short-run losses as other companies
  see the success and join the market causing
  profits to drop
• Graph C shows long-run equilibrium as the weaker
  firms leave the industry