Lecture Issues in economics today - Chapter 6

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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.

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Nội dung Text: Lecture Issues in economics today - Chapter 6

Chapter 6 Perfect Competition, Monopoly, and Economic vs. Normal Profit McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Chapter Outline • From Perfect Competition to Monopoly • Supply Under Perfect Competition McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
From Perfect Competition to Monopoly • Perfect Competition • Monopolistic Competition • Oligopoly • Monopoly McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Picking the Quantity to Maximize Profit P P MC ATC MC AVC ATC P* MR P* AVC D MR Q* Q* Q Q Many Competitors No Competitors McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Characteristics of Perfect Competition • a large number of competitors, such that no one firm can influence the price • the good a firm sells is indistinguishable from the ones its competitors sell • firms have good sales and cost forecasts • there is no legal or economic barrier to its entry into or exit from the market McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Monopoly • The sole seller of a good or service. • Some monopolies are generated because of legal rights (patents and copyrights). • Some monopolies are utilities (gas, water, electricity etc.) that result from high fixed costs. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Monopolistic Competition • Monopolistic Competition: a situation in a market where there are many firms producing similar but not identical goods. • Example : the fast-food industry. McDonald’s has a monopoly on the “Happy Meal” but has much competition in the market to feed kids burgers and fries. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Oligopoly • Oligopoly: a situation in a market where there are very few discernible competitors • Examples – Satellite TV service (Direct TV, Primestar, Dish Network) – Airlines (American, Delta etc.) McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Which Model Fits Reality? • Perfect competition is rare outside agriculture though it fits some labor markets. • Monopolies are common in utilities • Major branded companies are typically either in oligopolistic or monopolistically competitive industries. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Examples of Different Market Forms Perfect Monopolistic Oligopoly Monopoly Competition Competition 1) Agriculture 1) Fast Food 1) Cars and 1) Windows 2) Lumber 2) Airlines Trucks Operating 2) Soft Drinks system 2) Local Residential Utilities McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Distinguishing Characteristics Between Market Forms Perfect Monopolistic Oligopoly Monopoly Competition Competition Number of Many-often Several Few One thousands or Firms even millions Barriers to None Few Substantial Insurmountable Entry Product Homogeneous Heterogeneous Heterogeneous N/A Homo/Hetero -geneity McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Supply Under Perfect Competition McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Normal vs. Economic Profit • Normal Profit : the level of profit that business owners could get in their next best alternative investment • Economic Profit: any profit above normal profit McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Return on Equity For Various Industries Industry Rate of Return Net Income/(Assets-Liabilities) Agriculture 8.0% Manufacturing 14.6% Transportation and Public Utilities 10.6% Wholesale and Retail Trade 12.9% McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
When and Why Economic Profits Go to Zero McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Time Horizons • Short Run: the period of time where we cannot change things like plant and equipment • Long Run : the period of time where we can change things like plant and equipment McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Market Forms and Economic Profits • Under perfect competition or monopolistic competition, economic profits go to zero because of the entry of new firms increases market supply and lowers prices. • Economic profits are under no pressure to shrink under oligopoly or monopoly because entry doesn’t occur so prices do not fall. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 2 The Pressures on Price in Perfect Competition $ Long Run MC Pressure MR4 Short Run ATC Pressure AVC MR3 MR2 MR1 Q McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 3 Points of Production in Perfect Competition $ MC MR4 ATC AVC MR3 MR2 MR1 Q McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 4 Supply in Perfect Competition $ MC Supply ATC AVC Q McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.