Chapter 9 Imperfect competition and its polar case of monopoly A.Patterns of imperfect competition *monopoly *oligopoly *monopolistic competition. B.Marginal revenue and monopoly 1 2023/7117 Economics
1 2023/7/17 Economics Chapter 9 Imperfect competition and its polar case of monopoly A.Patterns of imperfect competition *monopoly *oligopoly *monopolistic competition. B.Marginal revenue and monopoly
Imperfect competition:definition and varieties Imperfect competition prevails in an industry whenever individual sellers have some measure of control over the price of their output. The imperfect competitor will face the downward-sloping demand curve as higher price drives sales down Varieties of imperfect competitors: monopoly,oligopoly,monopolistic competition (P169,Types of market structures) 2 2023/7117 Economics
2 2023/7/17 Economics Imperfect competition:definition and varieties ◼ Imperfect competition prevails in an industry whenever individual sellers have some measure of control over the price of their output. ◼ The imperfect competitor will face the downward-sloping demand curve as higher price drives sales down. ◼ Varieties of imperfect competitors: monopoly,oligopoly,monopolistic competition. (P169, Types of market structures)
Sources of market imperfections Economy of scale(natural monopoly) ■Barriers to entry --Legal restrictions include patents,entry restrictions,and foreign-trade tariffs and quotas. --High cost of entry --Advertising and product differentiation 3 2023/7117 Economics
3 2023/7/17 Economics Sources of market imperfections ◼ Economy of scale(natural monopoly) ◼ Barriers to entry --Legal restrictions include patents,entry restrictions,and foreign-trade tariffs and quotas. --High cost of entry --Advertising and product differentiation
B.Marginal revenue and monopoly Total revenue and marginal revenue Profit-maximizing conditions The marginal principle:let bygones be bygones 4 2023/7117 Economics
4 2023/7/17 Economics B.Marginal revenue and monopoly ◼ Total revenue and marginal revenue ◼ Profit-maximizing conditions ◼ The marginal principle: let bygones be bygones
Total,average and marginal revenue Total revenue:TR=AR Q Average revenue:AR=TR/Q Marginal revenue(MR)is the change in revenue that is generated by an additional unit of sales. MR=△TRI△Q If the demand curve is horizontal,P=AR=MR. If the demand curve is downward- sloping,P=AR>MR. 5 2023/7117 Economics
5 2023/7/17 Economics Total,average and marginal revenue ◼ Total revenue：TR=AR•Q ◼ Average revenue：AR=TR/Q ◼ Marginal revenue(MR) is the change in revenue that is generated by an additional unit of sales. MR=ΔTR/ΔQ ◼ If the demand curve is horizontal, P=AR=MR. ◼ If the demand curve is downwardsloping,P=AR>MR
Figure 9-1 Price,elasticity,marginal revenue and total revenue P >TR=P(Q)Q D Ed>1 MR=dTR/dQ=P[1-1/Ed] Ed=1EdMR >Ed>1,MR >0,TR rises, TR MR Ed=1,MR =0,TR reaches its maximum, >Ed<1,MR <0,TR falls. Q 6 2023/7/17 Economics
6 2023/7/17 Economics Figure 9-1 Price, elasticity,marginal revenue and total revenue ➢ TR=P(Q)•Q MR=dTR/dQ=P[1-1/Ed] P=AR >MR ➢ Ed>1,MR >0,TR rises, ➢ Ed=1,MR =0,TR reaches its maximum, ➢ Ed1 Ed<1 Q P
Profit-maximizing condition:MR=MC Total profit equals total revenue minus total cost.In symbols, T(Q)=TR(Q)-TC(Q) dTT/dQ=dTR /dQ dTC /dQ =0 dTR/dQ=dTC /dQ MR=MC The maximum-profit price(p*)and quantity(q*)of a monopolist come where the firm's marginal revenue equals its marginal cost. P=MC for a perfect competitor is a special case of MR=MC profit-maximization condition. 7 2023/7117 Economics
7 2023/7/17 Economics Profit-maximizing condition:MR=MC ◼ Total profit equals total revenue minus total cost. In symbols, π(Q) =TR(Q) – TC(Q) dπ/dQ=dTR /dQ - dTC /dQ =0 dTR /dQ=dTC /dQ MR=MC ◼ The maximum-profit price(p*) and quantity(q*) of a monopolist come where the firm’s marginal revenue equals its marginal cost. ◼ P=MC for a perfect competitor is a special case of MR=MC profit-maximization condition
Figure 9-2 Profit maximization TR TC MC AC P* TC AC* E MR D(AR) TR Q* Q Q* Q 8 2023/7117 Economics
8 2023/7/17 Economics Figure 9-2 Profit maximization O Q TR TC TC TR Q* O Q P D(AR) MR MC AC E Q* P* F AC* H
The marginal principle:let bygones be bygones One of the most important lessons of economics is that you should look at the marginal costs and marginal benefits of decisions and ignore past or sunk costs.(P179) 9 2023/7/17 Economics
9 2023/7/17 Economics The marginal principle:let bygones be bygones ◼ One of the most important lessons of economics is that you should look at the marginal costs and marginal benefits of decisions and ignore past or sunk costs.(P179)