Basic Terms
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Revenue = income from sales ($ in)
Cost = an expense ($ out)
Profit = Revenue – Cost
Marginal = Additional from One Unit
Perfect Competition
Long Run Economic Profit = Zero
• Accounting Profit=
Total Revenue -Total Explicit Costs
Explicit Costs= direct payments made
to others
examples= rent, utilities, wages,
materials
Long Run Economic Profit = Zero
• Economic Profit=
Total Revenue -Total Explicit/Implicit Costs
Implicit Costs= opportunity cost/ “profit”
required to keep entrepreneur from
“exiting” the market
examples= using land and equipment
to grow wheat instead of corn
Long Run Economic Profit = Zero
• Economic Profit > Zero
– Firms will “enter” the market in the long run
• Economic Profit < Zero
– Firms will “exit” the market in the long run
Long Run Economic Profit = Zero
• Economic Profit = 0
– called “normal profit”
Perfect Competition
• Profit Maximization-
MR=MC
• Long-Run Economic Profit = ZERO
Perfect Competition
• Decisions
– Quantity
Monopolistic Competition v. Oligopoly
Considerations:
# of Firms
Market Dominance
Geographic Area
Barriers to Entry
Monopolistic Competition v. Oligopoly
Do the decisions of one firm greatly affect
the others firms in the market?
Do the decisions of one firm have little/no
impact on the market?
Monopolistic Competition v. Oligopoly
A Dividing Line
4 Largest Firms control over 40% of the
market
Barriers to Entry
Think!
DeBeers
Walmart
Coca-Cola
Keurig K-Cups
Liquor Store (in PA)
Continental Airlines
Barriers to Entry
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Capital Cost
Customer Loyalty
Control of Resources
Economies of Scale
Legal
– Patents, copyrights
– Government regulation, licensing
Barriers to Entry
Think!
DeBeers
Walmart
Coca-Cola
Keurig K-Cups
Waste Management
Continental Airlines
Barriers to Entry
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Capital Cost
Customer Loyalty
Control of Resources
Economies of Scale
Legal
– Patents, copyrights
– Government regulation, licensing
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Algeria
Angola
Ecuador
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
OPEC
Oligopoly Terms
• Duopoly
• Collude/Collusion
• Cartel
Organization of Petroleum Exporting
Countries
FTC
Denied
Horizontal Merger
• Two companies in same industry
Vertical Merger
• Two companies in complimentary industries
Potential Competition Merger
Antitrust Laws
• Sherman Antitrust Act (1890)
– Banned predatory and unfair business practices
• Clayton Antitrust Act (1914)
– Specified unfair practices
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Interlocking Directories
Price Discrimination
Exclusive Dealings and Tying
Mergers to Destroy Competition
• Federal Trade Commission (FTC)
– Approves mergers and enforces trade regulations
Market Structures
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly