Bell Ringer
• What is the profit maximization point?
Andrea’s Software Business
120
100
P
r
i
c
e
Profit Maximization
Point
MR = MC
80
MC
Profit = ($56-$48.125) x 8 = $63
P
60
MR
Profit = (P-ATC) x QPROFIT
ATC
40
Total Revenue
=PxQ
TOTAL COST
20
TR = $56 x 8 = $448
0
1
2
3
4
5
Quantity
6
7
8
9
10
Market Structure
• The setting in which a seller finds itself.
• Market Structures are defined by the following
characteristics:
• Number of sellers in the market
• The product that sellers produce and sell
• How easy or difficult it is for new firms to enter the
market
Market Structure
• 4 types of Market Structure
•
•
•
•
Perfectly Competitive
Monopolistic
Monopolistic Competitive
Oligopolistic
Perfectly Competitive Market
• A market structure characterized by:
1. Many buyers and sellers
2. All firms selling identical goods
3. All relevant information about buying and selling
activities available to buyers and sellers
4. Easy entry into and easy exit out of the market
• Sellers in a PC market are PRICE TAKERS
• Price taker – a seller that can sell all its output at the
equilibrium price but can sell none of its output at any
other price
Costs and Competitive Market
Supply
• A look at Fiasco Company.
Bell Ringer
• What are the characteristics of a perfectly
competitive market?
Fiasco Company
Fiasco Company
Fiasco’s Cost Curves
Market Supply and Demand
Firms Making a Profit
Firms Experiencing a Loss
Long-Run Equilibrium
Bell Ringer
• Sketch a firm, in a Perfectly Competitive Market,
that is operating at the long-run equilibrium.
Profit as a Signal
Loss as a Signal
Two Resource Markets
Perfect Competition v. Monopoly
Perfectly Competitive Market
1. Many buyers and sellers
2. All firms selling identical
goods
3. Easy entry into and easy
exit out of the market
• Price taker – a seller that
can sell all its output at the
equilibrium price but can
sell none of its output at
any other price
Monopolistic Market
1. One seller
2. A good with no close
substitutes
3. High barriers to enter and
exit the market
Two Resource Markets
Perfect Competition v. Monopoly
Perfectly Competitive Market
1. Many buyers and sellers
2. All firms selling identical
goods
3. Easy entry into and easy
exit out of the market
• Price taker – a seller that
can sell all its output at the
equilibrium price but can
sell none of its output at
any other price
Monopolistic Market
1. One seller
2. A good with no close
substitutes
3. High barriers to enter and
exit the market
• Price Searcher – a seller
that can sell some of its
output at various prices
Perfect Competition v Monopoly
Perfect Competition v. Monopoly
• Classify the following product markets as being
more like a Perfect Competition market or more
like a Monopolistic Market:
•
•
•
•
•
•
Wheat
Cellphone service
Haircuts
Airline flights
Restaurant Hamburgers
Soft Drinks
Bell Ringer
• What is a “price searcher”?
Barriers to Entry – Imperfect Markets
• Legal Barriers
• Patents, copyrights, public franchise
• Public franchise is a right granted to a firm by government
that permits the firm to provide a good or service and
excludes
all others fromMONOPOLIES
doing so.
GOVERNMENT
• US Postal Service on 1st Class Mail
• Cable Companies
• Trash Collectors
• Low Per Unit Cost (Low ATC)
• Natural Monopoly
MARKET MONOPOLIES
• A firm with
such a low ATC that it is the only one that can
survive in the market
• Exclusive Ownership of a Resource
Jack and Jill’s Oligopoly Game
Jack’s
High Production: 40 Gal.
Jack gets $1,600 profit
Decision
Low Production: 30 gal.
Jack gets $1,500 profit
High
Cartel
Agreement
Production
Jill’s
Decision
40 gal.
An
agreement that specifies how the firms that
profit
Jill gets
profit
entered into
the$1,600
agreement
will actJillingets
a $2,000
coordinated
$2,000 profit among them
Jack gets $1,800 profit
way to reduce Jack
thegets
competition
Low
Production
30 gal.
Jill gets $1,500 profit
Jill gets $1,800 profit
Price Discrimination
• When a seller charges different prices to different
buyers and the price differences do not reflect cost
differences.
• Conditions that must exist:
1. Different customers must be willing and able to pay
different prices
2. The seller must be able to tell who is willing to pay the
different prices
3. It has to be impossible or extremely difficult for a
customer to resell the good
Price Discrimination
• Why price discriminate?
• A firm can increase its Total
Revenue
• Can be illegal if:
• It reduces competition
within a market
• A firm charges different
prices in different states
without a difference in costs
Demand Schedule for Widgets
Price
$10
Quantity
1
$8
$6
2
3
Bell Ringer
• What are ways that firms in Monopolistic
Competitive and Oligopolistic markets behave to
try to be more like Monopolies?
Advertising
• Used by firms to persuade buyers that its product is
more than slightly differentiated from those of its
competitors.
• Found mainly in monopolistic competitive markets
• Highlight the differences between similar products
• Brand names
• Designer labels
Government Regulation
• Government wants to maintain competition
because it is in the best interests of the consumers
• Antitrust laws – legislation passed for the stated
purpose of controlling monopoly power and
preserving and promoting competition.
Government Regulation
• Major Regulation Legislation (p. 199 – 201)
•
•
•
•
•
Sherman Antitrust Act of 1890
Clayton Act of 1914
Federal Trade Commission Act of 1914
Robinson-Patman Act of 1936
Wheeler-Lea Act of 1938
• Goal of the legislation
• Behaviors the legislation prohibits or limits
Antitrust Laws
• The Sherman Antitrust Law (1890)
•
Forming a trust (monopoly) is illegal
• The Clayton Act (1914)
• Certain businesses practices were made illegal if they lessen competition
• Price discrimination – when a seller charges different prices to different buyers
of the same product
• Tying contracts – sale of one good depends on the sale of another good
• The Federal Trade Commission Act (1914)
• Created the FTC
• Made “unfair methods of competition in commerce” are illegal
• The Robinson-Patman Act (1936)
•
Prohibits suppliers from offering special discounts to large chains unless
they offered them to everyone
• The Wheeler-Lea Act (1938)
•
Empowered the FTC to deal with false and deceptive practices by
businesses