part 3

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Week 11

Perfect Competition

identical product, many small buyers and sellers, equal access to full information and low transaction, no or low barriers to entry or exit

ex: west side market produce building, STOCK MARKET

Monopolistic Competition

basically the same as perfectly competitive, but slightly different products

ex: fast food restaurant

Oligopoly

high barriers to entry, few firms control a lot of the market

ex: oil producer, cereal manufacturer)

Monoply

one seller with very high market share

ex: cable, electric companies)

SHORT TERM Perfectly competitive firms are price takers, they cannot influence the market, no matter how much they sell, MR=D=AR=P

MC=MR --> Profit maximizing

the demand curve for individual firms faces in PC is perfectly elastic : cannot sell for more than the price (many sellers). Wouldn't want to sell for less than the price (many buyers, you don't need to convince)

individual firm : go up Q*, (MC-ATC)Q=profit

profit = TR-TC

Pi= P*q-TC

profit per unit = price - average total cost

(Pi/q) = P*q/q - TC/q ----> (pi/q) = P - ATC

set MR=MC, for PC, MR= P so P=MC

IN THE SHORT RUN, FIRMS SHOULD SHUT DOWN WHEN P<AVC

this means that they arent able to cover variable cost

if P>AVC, they cover VC and contributing to their fixed cost, so they should produce at MR=MC (aka P=MC)

Thursday 11.9.2017

LONG TERM perfectly competitive

how much OUTPUT to produce in the long-run

earning profits in the short run, more firms will enter which means more supply and price will be driven down

earning a loss in the long run, some firms will exit

firms will enter/exit until economic profit is driven to zero PROFIT^LR = 0

P=ATC

Economic vs Accounting profit

economic profit: includes opportunity costs in profit calculation

profit even above your next best alternative

Accounting profit: normal profit as usually calculated

doesn't include value of lost opportunity

firms may make zero econ profit but hey may ad usually make positive accounting profit. firms dont have incentives to enter or exit markets when economic profit is zero

Zero economic profit

P=min(ATC)

min(ATC) is where MC=ATC

so in long run perfect competition P=MC=ATC

P=MC bc of PC and P=ATC bc long run equilibrium profit=0

negative SR profit = firms exit until economic profit is back to zero

negative profit is incentive to exit market

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Week 12

Tuesday notes

Monopoly

One seller, unique product, limited information or high transition cost, no substitute, high barriers to entry and exit

price makers (price searchers

they choose their price by determining how many units to sell

because they are the only seller, to sell one more unit, they need to lower their price

Why we have monopolies

Firms want to be a monopoly because they would make more money

Sometimes a monopoly makes the most sense

sometimes a monopoly is a reward for innovation

TYPES

Natural: Production efficiency from barriers utility companies

arises due to high fixed costs or high setup costs

Geographic: no close competitors (high shopping costs) - last gas station for 40 miles

arisies from high cost of finding another seller

Technological: unique, not full info - new discovery, secret formula

arises from a unique product or hidden information

Government: granted by the government - patents (granted), US Postal Service

arises through government action

US awards the longest patent (20 years)

Price is not equal to marginal revenue

still use MR=MC but Price is demand curve

monopolists produces less output and charges higher price (than PC)

from consumer's POV, it's bad

LR profit

because of barriers to entry, monopolists can hold on to long run economic profit

profit>0

Why we dont like monopoly

worse for consumers and market overall

sell fewer units at a higher price

CSm<CSpc

some beneficial trades arent made

TSm<TSpc

firms make more profit

creates deadweight loss

Thursday notes

Price Discrimination

Different prices to different consumers for the same product

ex. Black friday, happy hour, coupon

really goof=d for firms, bc they make more money

conditions

1) seller must be price maker

2) Seller must be able to distinguish among buyers who are willing to pay different prices

3) reselling the good to other buyers must be impossible or too costly

Arbitrage: buying low, reselling high

Types

First degree discrimination : involves charging customers the maximum price they're willing to pay, no consumer surplus. (Perfect price discrimination)

Second Degree: charging different prices depending on the quantity consumed

Third Degree: charging different prices to different groups (when flight tickets are bought, student discounts, senior discounts, in-state vs out-of-state tuition)

Fourth Degree: charging same price to everyone even though firm incurs different costs (same price for disabled even if firm incurs more costs)

Premium pricing: NOT PRICE DISCRIMINATION, firms charge different prices for slightly different variations of the good (first class vs economy class flight)

Perfect price discrimination : Demand and MR is the same, NO Deadweight Loss, Same output as perfect competition, profit when atc is below price

OTHER RESOURCES

https://courses.byui.edu/econ_150/econ_150_old_site/lesson_08.htm