Lecture Introduction to economics: Social issues and economic thinking: Chapter 18 - Wendy A. Stock

Chapter 18 - Competition and monopoly. After completing this unit, you should be able to: Understand how firms determine the optimal level of output, demonstrate the differences in output choices between firms in perfect competition and monopoly, compare profits for perfectly competitive firms and monopolies,…

Introduction to Economics: Social Issues and Economic Thinking

Wendy A Stock

PowerPoint Prepared by

Z Pan

Chapter 18

Competition and Monopoly

Ø Understand how firms

determine the optimal level of

output

Ø Demonstrate the differences in

output choices between firms in

perfect competition and

monopoly

Ø Compare profits for perfectly

competitive firms and

monopolies

Ø Assess the economic efficiency of firms in perfect competition versus

monopolies

Ø Understand why some economists argue for regulation of monopoly power

After studying this chapter, you should be

able to:

Profits and COSTS

Costs of production

Output and Revenue

Output and Revenue

Ø The Profit-maximizing Output Level for a firm

THE PROFIT-MAXIMIZING OUTPUT LEVEL

THE PROFIT-MAXIMIZING OUTPUT LEVEL

Ø Perfect Competition is a market characterized by many firms producing identical products for a

large number of buyers Buyers and sellers have complete information about prices, and firms can easily enter or exit the market

Ø Identical products

Ø Complete information

Ø Many buyers and sellers

Ø Easy entry and exit

PERFECT COMPETITION

Ø Price Taker are firms that cannot set the price of their good, but instead must take the market

perfect competition market and firm

Ø Normal Profit is the profit that business owners could earn if they applied their resources and

skills in their next best business alternative

Ø Normal profit is total revenue minus total cost,

including opportunity cost

Ø Economic Profit occurs when a firm earns more than $0 in normal profits

Normal profit and economic profit

Ø A Monopoly is a market with only one seller of a good or service

Ø In the early 1900s, De Beers controlled 90

percent of the world ’s diamond mines and

production

Ø Monopolies arise because barriers to entry

Ø Barriers to Entry are obstructions that make it difficult for new firms to enter a market

Monopoly

Ø A monopolist is a price setter.

Ø Price Setters are firms that are able to set the prices for their products

Price setters

Market Demand and Marginal Revenue under Monopoly

Demand and Marginal Revenue under

Monopoly

Profit-Maximizing Output

for Monopoly Firms

Comparing Perfect Competition

and Monopoly

Ø Resource allocative efficiency results from the

situation where MB = MC for the society

Ø Under Perfect Competition

MB = P = MR = MC Efficient

Ø Under Monopoly

MB = P > MR = MC Inefficient

At the level of output Q*(m), MB = P > MC implies

Perfect Competition, Monopoly,

and Efficiency

Ø Antitrust Laws are laws that promote competition between businesses and prohibit anti-

competitive behavior by firms with large control over markets

Ø Clayton Anti-Trust Act

MONOPOLY REGULATION

1 Why is the price for a perfectly competitive

firm equal to marginal revenue but the price for a monopoly firm greater than marginal revenue?

2 Can a monopolist charge whatever it

wants for its product? Why or why not?

Copyright © 2013 John Wiley

& Sons, Inc.

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Key Concepts

• Monopoly

• Profit

• Total costs of production

• Marginal costs of production