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8/4/2019 Market Structures 2
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Market Structures
Chapter 8
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Profit Maximization
The goal of the firm is to maximizeprofits
= Pq C(q)
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Profit Maximization
Each unit of output increases revenues
by the Marginal Revenue
It also increases costs by the Marginal
Cost
MR =(Pq)
q
MC =C
q
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Profit Maximization If MR > MC, profits increase because
revenues rise faster than costs, but if MR MC implies that the value to society
of the last unit of output is greater thanthe cost to society of obtaining it
b) MC AC i.e. production costs per unitare not minimized
2. The monopoly can earn positiveeconomic profits because other firmscannot enter the market
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Monopoly Ex. Suppose a Monopolist faces market demand Q =
600 2P and has a cost function C = 100 + q2 where
MC = 2q . Find the equilibrium price, quantity, and
monopoly profit.
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Monopoly
Depending on the shape of the AC
curve relative to market demand, it may
be beneficial for the monopolist to
produce output at more than one plant
If a firm decides to produce in a multi-
plant setting, it must decide how muchoutput to produce at each plant
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Multi-plant Output Producing one more unit of output increases
revenue by MR and cost by MC so
MR = MC1(Q1)and
MR = MC2(Q2)
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Multi-plant Output
This implies that
MC1(Q1) = MC2(Q2)so that marginal cost is the same at all
plants (makes sense since if one plant
was cheaper than another, you shouldproduce more at the cheap one and
less at the expensive one)
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Multi-plant Output
This DOES NOT imply that output is the
same at both plants. To the extent that
the plants have different cost functions
(and thus different MC functions), output
will vary
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Multi-plant Output Ex. Suppose demand is given by Q = 140 2P . The
Monopolist has two plants, one with MC1 = 3Q1 and
the other with MC2 = Q2 . How much output should be
produced at each plant?
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Social Cost of a Monopoly
The Monopoly will generate a Dead
Weight Loss because P > MC
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Monopolistic Competition
There are no barriers to entry (like
perfect competition)
Each firm sells a differentiated product
so each firm has some discretion over
the price it charges
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Monopolistic Competition Monopolistically
Competitive firms
face a downwardsloping demandcurve and so havea downward sloping
MR curve
They set MR = MC
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Monopolistic Competition
If P > AC , the firm
will earn profits
and new firms willenter the market
until price has
eroded to thepoint where
P = AC
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Notes on Monopolistic Competition
Capital distribution is efficient. P = AC
so no firm is earning economic profits.
There is no advantage to entering orleaving this market
Production is NOT efficient. P > MC so
there is some deadweight loss tosociety. AC > MC so AC is NOT
minimized
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
Monopolistic Competition Ex. Suppose a Monopolistically Competitive firm
faces a demand function Q = 160 P and has a Cost
Function C = 3200 + q2 where MC = 2q. What
quantity and price does the firm charge? Would you
expect this firm to face increased competition in the
Long Run?
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ECON 2106: Managerial Economics Prof. Colin Mang, 2011
Lecture 8: Market Structures
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