Tài liệu Ten Principles of Economics - Part 31 docx

Marginal analysis has given us a theory of the supply curve in a competitive market and, as a result, a deeper understanding of market outcomes.. In particular, if firms are competitive

Thus, for these two reasons, the long-run supply curve in a market may be

up-ward sloping rather than horizontal, indicating that a higher price is necessary to

induce a larger quantity supplied Nonetheless, the basic lesson about entry and

exit remains true Because firms can enter and exit more easily in the long run than in the

short run, the long-run supply curve is typically more elastic than the short-run supply

curve.

Q U I C K Q U I Z : In the long run with free entry and exit, is the price in a

market equal to marginal cost, average total cost, both, or neither? Explain

with a diagram

C O N C L U S I O N : B E H I N D T H E S U P P LY C U R V E

We have been discussing the behavior of competitive profit-maximizing firms You

may recall from Chapter 1 that one of the Ten Principles of Economics is that rational

people think at the margin This chapter has applied this idea to the competitive

firm Marginal analysis has given us a theory of the supply curve in a competitive

market and, as a result, a deeper understanding of market outcomes

We have learned that when you buy a good from a firm in a competitive

mar-ket, you can be assured that the price you pay is close to the cost of producing that

good In particular, if firms are competitive and profit-maximizing, the price of a

good equals the marginal cost of making that good In addition, if firms can freely

enter and exit the market, the price also equals the lowest possible average total

cost of production

Although we have assumed throughout this chapter that firms are price

tak-ers, many of the tools developed here are also useful for studying firms in less

competitive markets In the next three chapters we will examine the behavior of

firms with market power Marginal analysis will again be useful in analyzing these

firms, but it will have quite different implications

◆ Because a competitive firm is a price taker, its revenue is

proportional to the amount of output it produces The

price of the good equals both the firm’s average revenue

and its marginal revenue.

◆ To maximize profit, a firm chooses a quantity of output

such that marginal revenue equals marginal cost.

Because marginal revenue for a competitive firm equals

the market price, the firm chooses quantity so that price

equals marginal cost Thus, the firm’s marginal cost

curve is its supply curve.

◆ In the short run when a firm cannot recover its fixed

costs, the firm will choose to shut down temporarily if

the price of the good is less than average variable cost.

In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.

◆ In a market with free entry and exit, profits are driven to zero in the long run In this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.

◆ Changes in demand have different effects over different time horizons In the short run, an increase in demand raises prices and leads to profits, and a decrease in

S u m m a r y

demand lowers prices and leads to losses But if firms

can freely enter and exit the market, then in the long run

the number of firms adjusts to drive the market back to the zero-profit equilibrium.

competitive market, p 292

average revenue, p 294

marginal revenue, p 294 sunk cost, p 298

K e y C o n c e p t s

1 What is meant by a competitive firm?

2 Draw the cost curves for a typical firm For a given

price, explain how the firm chooses the level of output

that maximizes profit.

3 Under what conditions will a firm shut down

temporarily? Explain.

4 Under what conditions will a firm exit a market?

Explain.

5 Does a firm’s price equal marginal cost in the short run,

in the long run, or both? Explain.

6 Does a firm’s price equal the minimum of average total cost in the short run, in the long run, or both? Explain.

7 Are market supply curves typically more elastic in the short run or in the long run? Explain.

Q u e s t i o n s f o r R e v i e w

1 What are the characteristics of a competitive market?

Which of the following drinks do you think is best

described by these characteristics? Why aren’t the

others?

a tap water

b bottled water

c cola

d beer

2 Your roommate’s long hours in Chem lab finally paid

off—she discovered a secret formula that lets people do

an hour’s worth of studying in 5 minutes So far, she’s

sold 200 doses, and faces the following

average-total-cost schedule:

If a new customer offers to pay your roommate $300 for

one dose, should she make one more? Explain.

3 The licorice industry is competitive Each firm produces

2 million strings of licorice per year The strings have an

average total cost of $0.20 each, and they sell for $0.30.

a What is the marginal cost of a string?

b Is this industry in long-run equilibrium? Why or why not?

4 You go out to the best restaurant in town and order a lobster dinner for $40 After eating half of the lobster, you realize that you are quite full Your date wants you

to finish your dinner, because you can’t take it home and because “you’ve already paid for it.” What should you do? Relate your answer to the material in this chapter.

5 Bob’s lawn-mowing service is a profit-maximizing, competitive firm Bob mows lawns for $27 each His total cost each day is $280, of which $30 is a fixed cost.

He mows 10 lawns a day What can you say about Bob’s short-run decision regarding shut down and his long-run decision regarding exit?

6 Consider total cost and total revenue given in the table below:

Q UANTITY

Total cost $8 $9 $10 $11 $13 $19 $27 $37

a Calculate profit for each quantity How much should the firm produce to maximize profit?

P r o b l e m s a n d A p p l i c a t i o n s

b Calculate marginal revenue and marginal cost for

each quantity Graph them (Hint: Put the points

between whole numbers For example, the marginal

cost between 2 and 3 should be graphed at 2 1/2.)

At what quantity do these curves cross? How does

this relate to your answer to part (a)?

c Can you tell whether this firm is in a competitive

industry? If so, can you tell whether the industry is

in a long-run equilibrium?

7 From The Wall Street Journal (July 23, 1991): “Since

peaking in 1976, per capita beef consumption in the

United States has fallen by 28.6 percent [and] the size

of the U.S cattle herd has shrunk to a 30-year low.”

a Using firm and industry diagrams, show the

short-run effect of declining demand for beef Label the

diagram carefully and write out in words all of the

changes you can identify.

b On a new diagram, show the long-run effect of

declining demand for beef Explain in words.

8 “High prices traditionally cause expansion in an

industry, eventually bringing an end to high prices and

manufacturers’ prosperity.” Explain, using appropriate

diagrams.

9 Suppose the book-printing industry is competitive and

begins in a long-run equilibrium.

a Draw a diagram describing the typical firm in the

industry.

b Hi-Tech Printing Company invents a new process

that sharply reduces the cost of printing books.

What happens to Hi-Tech’s profits and the price of

books in the short run when Hi-Tech’s patent

prevents other firms from using the new

technology?

c What happens in the long run when the patent

expires and other firms are free to use the

technology?

10 Many small boats are made of fiberglass, which is

derived from crude oil Suppose that the price of oil

rises.

a Using diagrams, show what happens to the cost

curves of an individual boat-making firm and to the

market supply curve.

b What happens to the profits of boat makers in the

short run? What happens to the number of boat

makers in the long run?

11 Suppose that the U.S textile industry is competitive,

and there is no international trade in textiles In

long-run equilibrium, the price per unit of cloth is $30.

a Describe the equilibrium using graphs for the entire

market and for an individual producer.

Now suppose that textile producers in other countries are willing to sell large quantities of cloth in the United States for only $25 per unit.

b Assuming that U.S textile producers have large fixed costs, what is the short-run effect of these imports on the quantity produced by an individual producer? What is the short-run effect on profits? Illustrate your answer with a graph.

c What is the long-run effect on the number of U.S firms in the industry?

12 Suppose there are 1,000 hot pretzel stands operating in New York City Each stand has the usual U-shaped average-total-cost curve The market demand curve for pretzels slopes downward, and the market for pretzels

is in long-run competitive equilibrium.

a Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand.

b Now the city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800 What effect will this action have

on the market and on an individual stand that is still operating? Use graphs to illustrate your answer.

c Suppose that the city decides to charge a license fee for the 800 licenses How will this affect the number

of pretzels sold by an individual stand, and the stand’s profit? The city wants to raise as much revenue as possible and also wants to ensure that

800 pretzel stands remain in the city By how much should the city increase the license fee? Show the answer on your graph.

13 Assume that the gold-mining industry is competitive.

a Illustrate a long-run equilibrium using diagrams for the gold market and for a representative gold mine.

b Suppose that an increase in jewelry demand induces a surge in the demand for gold Using your diagrams, show what happens in the short run to the gold market and to each existing gold mine.

c If the demand for gold remains high, what would happen to the price over time? Specifically, would the new long-run equilibrium price be above, below, or equal to the short-run equilibrium price in part (b)? Is it possible for the new long-run

equilibrium price to be above the original long-run equilibrium price? Explain.

14 (This problem is challenging.) The New York Times

(July 1, 1994) reported on a Clinton administration proposal to lift the ban on exporting oil from the North Slope of Alaska According to the article, the administration said that “the chief effect of the ban has

been to provide California refiners with crude oil

cheaper than oil on the world market The ban

created a subsidy for California refiners that had not

been passed on to consumers.” Let’s use our analysis of

firm behavior to analyze these claims.

a Draw the cost curves for a California refiner and for

a refiner in another part of the world Assume that

the California refiners have access to inexpensive

Alaskan crude oil and that other refiners must buy

more expensive crude oil from the Middle East.

b All of the refiners produce gasoline for the world gasoline market, which has a single price In the long-run equilibrium, will this price depend on the costs faced by California producers or the costs faced by other producers? Explain (Hint: California cannot itself supply the entire world market.) Draw new graphs that illustrate the profits earned by a California refiner and another refiner.

c In this model, is there a subsidy to California refiners? Is it passed on to consumers?

Y O U W I L L .

S e e w h y m o n o p o l i e s

t r y t o c h a r g e

d i f f e r e n t p r i c e s t o

d i f f e r e n t c u s t o m e r s

S e e h o w t h e

m o n o p o l y ’ s

d e c i s i o n s a f f e c t

e c o n o m i c w e l l - b e i n g

L e a r n w h y s o m e

m a r k e t s h a v e o n l y

o n e s e l l e r

A n a l y z e h o w a

m o n o p o l y

d e t e r m i n e s t h e

q u a n t i t y t o p r o d u c e

a n d t h e p r i c e t o

c h a r g e

C o n s i d e r t h e

v a r i o u s p u b l i c

p o l i c i e s a i m e d a t

s o l v i n g t h e p r o b l e m

o f m o n o p o l y

If you own a personal computer, it probably uses some version of Windows, the

operating system sold by the Microsoft Corporation When Microsoft first

de-signed Windows many years ago, it applied for and received a copyright from the

government The copyright gives Microsoft the exclusive right to make and sell

copies of the Windows operating system So if a person wants to buy a copy of

Windows, he or she has little choice but to give Microsoft the approximately $50

that the firm has decided to charge for its product Microsoft is said to have a

mo-nopoly in the market for Windows.

Microsoft’s business decisions are not well described by the model of firm

behavior we developed in Chapter 14 In that chapter, we analyzed competitive

mar-kets, in which there are many firms offering essentially identical products, so each

firm has little influence over the price it receives By contrast, a monopoly such as

Microsoft has no close competitors and, therefore, can influence the market price of

its product While a competitive firm is a price taker, a monopoly firm is a price maker.

M O N O P O L Y

In this chapter we examine the implications of this market power We will see that market power alters the relationship between a firm’s price and its costs A competitive firm takes the price of its output as given by the market and then chooses the quantity it will supply so that price equals marginal cost By contrast, the price charged by a monopoly exceeds marginal cost This result is clearly true

in the case of Microsoft’s Windows The marginal cost of Windows—the extra cost that Microsoft would incur by printing one more copy of the program onto some floppy disks or a CD—is only a few dollars The market price of Windows is many times marginal cost

It is perhaps not surprising that monopolies charge high prices for their prod-ucts Customers of monopolies might seem to have little choice but to pay what-ever the monopoly charges But, if so, why does a copy of Windows not cost $500?

Or $5,000? The reason, of course, is that if Microsoft set the price that high, fewer people would buy the product People would buy fewer computers, switch to other operating systems, or make illegal copies Monopolies cannot achieve any level of profit they want, because high prices reduce the amount that their cus-tomers buy Although monopolies can control the prices of their goods, their prof-its are not unlimited

As we examine the production and pricing decisions of monopolies, we also consider the implications of monopoly for society as a whole Monopoly firms, like competitive firms, aim to maximize profit But this goal has very different ramifi-cations for competitive and monopoly firms As we first saw in Chapter 7, self-interested buyers and sellers in competitive markets are unwittingly led by an invisible hand to promote general economic well-being By contrast, because monopoly firms are unchecked by competition, the outcome in a market with a monopoly is often not in the best interest of society

One of the Ten Principles of Economics in Chapter 1 is that governments can

sometimes improve market outcomes The analysis in this chapter will shed more light on this principle As we examine the problems that monopolies raise for so-ciety, we will also discuss the various ways in which government policymakers might respond to these problems The U.S government, for example, keeps a close eye on Microsoft’s business decisions In 1994, it prevented Microsoft from buying Intuit, a software firm that sells the leading program for personal finance, on the grounds that the combination of Microsoft and Intuit would concentrate too much market power in one firm Similarly, in 1998, the U.S Justice Department objected when Microsoft started integrating its Internet browser into its Windows operat-ing system, claimoperat-ing that this would impede competition from other companies, such as Netscape This concern led the Justice Department to file suit against Microsoft, the final resolution of which was still unsettled as this book was going

to press

W H Y M O N O P O L I E S A R I S E

A firm is a monopoly if it is the sole seller of its product and if its product does not

have close substitutes The fundamental cause of monopoly is barriers to entry: A

mo-nopoly remains the only seller in its market because other firms cannot enter the market and compete with it Barriers to entry, in turn, have three main sources:

m o n o p o l y

a firm that is the sole seller of a

product without close substitutes

C A S E S T U D Y THE DEBEERS DIAMOND MONOPOLY

A classic example of a monopoly that arises from the ownership of a key

re-source is DeBeers, the South African diamond company DeBeers controls about

80 percent of the world’s production of diamonds Although the firm’s share of

the market is not 100 percent, it is large enough to exert substantial influence

over the market price of diamonds

How much market power does DeBeers have? The answer depends in part

on whether there are close substitutes for its product If people view emeralds,

rubies, and sapphires as good substitutes for diamonds, then DeBeers has

rela-tively little market power In this case, any attempt by DeBeers to raise the price

of diamonds would cause people to switch to other gemstones But if people

view these other stones as very different from diamonds, then DeBeers can

ex-ert substantial influence over the price of its product

DeBeers pays for large amounts of advertising At first, this decision might

seem surprising If a monopoly is the sole seller of its product, why does it need

to advertise? One goal of the DeBeers ads is to differentiate diamonds from other

gems in the minds of consumers When their slogan tells you that “a diamond

is forever,” you are meant to think that the same is not true of emeralds, rubies,

and sapphires (And notice that the slogan is applied to all diamonds, not just

DeBeers diamonds—a sign of DeBeers’s monopoly position.) If the ads are

◆ A key resource is owned by a single firm

◆ The government gives a single firm the exclusive right to produce some

good or service

◆ The costs of production make a single producer more efficient than a large

number of producers

Let’s briefly discuss each of these

M O N O P O LY R E S O U R C E S

The simplest way for a monopoly to arise is for a single firm to own a key resource

For example, consider the market for water in a small town in the Old West If

dozens of town residents have working wells, the competitive model discussed in

Chapter 14 describes the behavior of sellers As a result, the price of a gallon of

wa-ter is driven to equal the marginal cost of pumping an extra gallon But if there is

only one well in town and it is impossible to get water from anywhere else, then

the owner of the well has a monopoly on water Not surprisingly, the monopolist

has much greater market power than any single firm in a competitive market In

the case of a necessity like water, the monopolist could command quite a high

price, even if the marginal cost is low

Although exclusive ownership of a key resource is a potential cause of

mo-nopoly, in practice monopolies rarely arise for this reason Actual economies are

large, and resources are owned by many people Indeed, because many goods are

traded internationally, the natural scope of their markets is often worldwide There

are, therefore, few examples of firms that own a resource for which there are no

close substitutes

“Rather than a monopoly, we like

to consider ourselves ‘the only game in town.’”

successful, consumers will view diamonds as unique, rather than as one among many gemstones, and this perception will give DeBeers greater market power

G O V E R N M E N T - C R E AT E D M O N O P O L I E S

In many cases, monopolies arise because the government has given one person or firm the exclusive right to sell some good or service Sometimes the monopoly arises from the sheer political clout of the would-be monopolist Kings, for exam-ple, once granted exclusive business licenses to their friends and allies At other times, the government grants a monopoly because doing so is viewed to be in the public interest For instance, the U.S government has given a monopoly to a com-pany called Network Solutions, Inc., which maintains the database of all com, net, and org Internet addresses, on the grounds that such data need to be central-ized and comprehensive

The patent and copyright laws are two important examples of how the gov-ernment creates a monopoly to serve the public interest When a pharmaceutical company discovers a new drug, it can apply to the government for a patent If the government deems the drug to be truly original, it approves the patent, which gives the company the exclusive right to manufacture and sell the drug for 20 years Similarly, when a novelist finishes a book, she can copyright it The copy-right is a government guarantee that no one can print and sell the work without the author’s permission The copyright makes the novelist a monopolist in the sale

of her novel

The effects of patent and copyright laws are easy to see Because these laws give one producer a monopoly, they lead to higher prices than would occur under competition But by allowing these monopoly producers to charge higher prices and earn higher profits, the laws also encourage some desirable behavior Drug companies are allowed to be monopolists in the drugs they discover in order to en-courage pharmaceutical research Authors are allowed to be monopolists in the sale of their books to encourage them to write more and better books

Thus, the laws governing patents and copyrights have benefits and costs The benefits of the patent and copyright laws are the increased incentive for creative activity These benefits are offset, to some extent, by the costs of monopoly pricing, which we examine fully later in this chapter

N AT U R A L M O N O P O L I E S

An industry is a natural monopoly when a single firm can supply a good or

ser-vice to an entire market at a smaller cost than could two or more firms A natural monopoly arises when there are economies of scale over the relevant range of out-put Figure 15-1 shows the average total costs of a firm with economies of scale In this case, a single firm can produce any amount of output at least cost That is, for any given amount of output, a larger number of firms leads to less output per firm and higher average total cost

An example of a natural monopoly is the distribution of water To provide wa-ter to residents of a town, a firm must build a network of pipes throughout the town If two or more firms were to compete in the provision of this service, each firm would have to pay the fixed cost of building a network Thus, the average to-tal cost of water is lowest if a single firm serves the entire market

n a t u r a l m o n o p o l y

a monopoly that arises because a

single firm can supply a good or

service to an entire market at a

smaller cost than could two or

more firms

We saw other examples of natural monopolies when we discussed public

goods and common resources in Chapter 11 We noted in passing that some goods

in the economy are excludable but not rival An example is a bridge used so

infre-quently that it is never congested The bridge is excludable because a toll collector

can prevent someone from using it The bridge is not rival because use of the

bridge by one person does not diminish the ability of others to use it Because there

is a fixed cost of building the bridge and a negligible marginal cost of additional

users, the average total cost of a trip across the bridge (the total cost divided by the

number of trips) falls as the number of trips rises Hence, the bridge is a natural

monopoly

When a firm is a natural monopoly, it is less concerned about new entrants

eroding its monopoly power Normally, a firm has trouble maintaining a

monop-oly position without ownership of a key resource or protection from the

govern-ment The monopolist’s profit attracts entrants into the market, and these entrants

make the market more competitive By contrast, entering a market in which

an-other firm has a natural monopoly is unattractive Would-be entrants know that

they cannot achieve the same low costs that the monopolist enjoys because, after

entry, each firm would have a smaller piece of the market

In some cases, the size of the market is one determinant of whether an

indus-try is a natural monopoly Consider a bridge across a river When the population is

small, the bridge may be a natural monopoly A single bridge can satisfy the entire

demand for trips across the river at lowest cost Yet as the population grows and

the bridge becomes congested, satisfying the entire demand may require two or

more bridges across the same river Thus, as a market expands, a natural

monop-oly can evolve into a competitive market

Q U I C K Q U I Z : What are the three reasons that a market might have a

monopoly? ◆ Give two examples of monopolies, and explain the reason

for each

Quantity of Output

Average total cost 0

Cost

F i g u r e 1 5 - 1

E CONOMIES OF S CALE AS A

C AUSE OF M ONOPOLY When a firm’s average-total-cost curve continually declines, the firm has what is called a natural monopoly In this case, when production is divided among more firms, each firm produces less, and average total cost rises.

As a result, a single firm can produce any given amount at the smallest cost.

H O W M O N O P O L I E S M A K E P R O D U C T I O N

A N D P R I C I N G D E C I S I O N S

Now that we know how monopolies arise, we can consider how a monopoly firm decides how much of its product to make and what price to charge for it The analysis of monopoly behavior in this section is the starting point for evaluating whether monopolies are desirable and what policies the government might pursue

in monopoly markets

M O N O P O LY V E R S U S C O M P E T I T I O N The key difference between a competitive firm and a monopoly is the monopoly’s ability to influence the price of its output A competitive firm is small relative to the market in which it operates and, therefore, takes the price of its output as given by market conditions By contrast, because a monopoly is the sole producer in its market,

it can alter the price of its good by adjusting the quantity it supplies to the market One way to view this difference between a competitive firm and a monopoly

is to consider the demand curve that each firm faces When we analyzed profit maximization by competitive firms in Chapter 14, we drew the market price as a horizontal line Because a competitive firm can sell as much or as little as it wants

at this price, the competitive firm faces a horizontal demand curve, as in panel (a)

of Figure 15-2 In effect, because the competitive firm sells a product with many

Quantity of Output Demand (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve

0

Price

Quantity of Output 0

Price

Demand

F i g u r e 1 5 - 2 D EMAND C URVES FOR C OMPETITIVE AND M ONOPOLY F IRMS Because competitive firms

are price takers, they in effect face horizontal demand curves, as in panel (a) Because a monopoly firm is the sole producer in its market, it faces the downward-sloping market demand curve, as in panel (b) As a result, the monopoly has to accept a lower price if it wants to sell more output.