week 5 perfect comp/ monopoly Flashcards
profit
total revenue (pricexquantity) - total cost
Shut down condition
Higher profits will be achieved by shutting down rather than producing an output greater than 0 if the price is less than the average variable cost as each unit produced increases losses.
producer surplus
Producer surplus is the profits + the fixed costs
Perfect competition
many firms in the market due to low barriers to entry, the firms are price takers as they sell homogeneous goods so they only get to choose the quantity at which they sell.
profit maximization in perfect comp
marginal revenue= marginal cost
what does second order condition tell
profit max level of quantity is where MC is increasing
shut down condition in the short run
You should shut down if the price is less than average variable cost.
As you won’t be covering your fixed costs
producer surplus
profits + fixed costs
Long run shut down condition
Price is lower than average cost in the long run
Short run have to cover variable costs, however long run can’t run losses forever. Price has to cover all of costs.
what does LR supply look like
straight horizontal line
Efficiency of perfect comp
If all firms have the same market price all their marginal costs will be equal mci=mcj=p
The equilibrium is efficient
As… The social objective. Max sum of profits for all firms. Also captures consumer willingness
Choose q to max sum of profits. Way to do it is to find amounts of quantities for different firms so that price is equal to marginal cost.
Monopoly
one firm, differentiated goods, price maker, high barriers to entry
why can’t monopoly charge whatever they want
Cant charge high and sell loads as monopolist is still constrained by the market demand curve. As consumer may not be willing to pay the price set.
What happens when one extra unit is sold in monopoly
- Increase in revenue as sold one more unit,
but actually decrease in revenue as supply increased so price chargeable for all units declines. Assumption is setting price once. These are called inframarginal units (units sold before the final unit sold).
Monopolists problem
The key problem the monopolist must solve is how to balance two forces with the marginal cost gives the profit maximising choice.
This is MR=MC
whats monopolist optimal choice
produce where demand is elastic asCant profit max as it doesn’t make sense mr=negative. And another value of production would give a higher profit
Price inelastic means reduce output, prices increase so increase in revenue and decrease in total costs (producing less) so increase profits. When inelastic not maximising.
monopolists facing linear demand
higher price lower output compared to perfect comp
Markup pricing
Rearranged to put price on its own
Price as a function of PED
Found that monopolist must charge on the elastic part of the demand curve
Denominator of equation must be between 0 and 1
Thus monopolist charges a markup on marginal cost as if denominator between 0 and 1.
Say it’s a 1/2 then the price is going to equal marginal cost as marginal cost divided by 1/2 is 2 x marginal cost
Scalling up marginal cost to determine price
Markup is lower the more elastic demand is, big falls in demand if increase price tooo much.
Is monopoly outcome efficient compared to perfect comp
Compared to perfect competition monopoly outcome has a higher price and lower quantity.
Therefore consumers are worse off as they buy less and pay more. Firms are better off as they charge higher prices and make more profit than perfect competition at least in the long run.
To make a non-value judgment we use pareto efficiency.
A outcome is said to be pareto efficient when there is no way to make anyone better off without making someone worse off.
Therefore question is… is the monopoly price and quantity pareto efficient.
For monopoly- it is not pareto efficient as pareto improvements exist for all units of output between perfect comp and monopoly output. (is possible to make someone better off without making someone worse off)
dead weight loss
Deadweight loss is change in consumer + producer surplus as move from monopoly to perfect competition.
price discrimination
different prices sold to different consumers
first degree price discrimination
First degree price discrimination- (perfect price discrimination)- different output units sold at different prices, prices differ between people.
each consumer is charged their marginal willingness to pay for each unit
second degree price discrimination
Second degree price discrimination- different amounts sold at different prices e.g bulk buy discount. All consumers of a given amount pay same price e.g buy 5 pay same amount as everyone else buying 5
constructing price quantity packages targeted at low demand and high demand consumers
the purchase behavior will reveal the type of consumer
third degree price discrimination
Third degree price discrimination- different people pay different prices depending on the type of person you’re e.g students pay student discount.
