AP Micro unit 4

Price discrimination

• when a firm sells the same unit of output at different prices [diff price w diff costumers/conditions]

• DWL is eliminated or very close to if Perfect P.D

For price discrimination to be possible, three conditions must exist:

1. The firm must have market power (it can set prices).

2. It must be able to segregate markets — meaning it can separate consumers into groups with different demand elasticities.

3. Consumers must not be able to resell the product, because resale would undo the price differences.

Why do firms price discriminate?

To increase profit and output by creating more producer surplus/profit

Elastic Consumer

Very sensitive to price changes

Inelastic costumer

Not sensitive to price changes

3rd degree P.D

charges different groups of people different prices [bc diff groups have more sensitivity]

→ lores in groups who would other wise not come w/out a discount making profit 100 instead of zero

2nd degree P.D

Different prices based on different quantities [bulk buy is cheaper]

1st degree P.D : perfect price discrimination

charge each person the price theyre willing to pay

[uni tuition goes up or down at what they can charge an individuals]

Why does the MR curve fall faster than the price

As they lower the price of the next unit of output → price must be lowered on all previous units → MR falls faster

What happens to MR as perfect P.D is in place

it will be equal to price [every consumer pays full price of what they can,,,5k is all u will then all 5k it is]

Perfect p.d

graph

1. max profit is mr =mc

2. firm charges every price on the demand curve downwards till the max quantity is charged

3. pf is the max price of product for just the last unit of output

4. Allocatively efficient

5. Turn c.s into all profit + (p - atc) x Q

Monopolistic competition

Many sellers

Low barriers to entry [Highly competitive]

Zero long-run profit

Different goods

some impact on prices

price goes up when less is made

What does differentiation of product allow?

Market power

Market structures in comparison

What the demand curve is

Perfect competition: perfectly elastic

Monopoly: entire market demand of an item

Monopolistic competition: only a portion of market demand [1 pizza firm vs entire market for pizza]

Oligopoly: Depends on rivals

Monopolistic Competition

Increase in price

more substitutes are bought

Monopolistic Competition

Increase in output

price must fall

Profit Maximization

MR=MC → for all firms

Monopolistic Competition

Short run Economic profit/loss

profit → p>ATC

loss but operate → p<ATC but p>AVC

loss → p< ATC and AVC

Monopolistic Competition

Short run graph

find maximization q to find price by going upwards to the demand curve

Monopolistic Competition

Long run graph

Will hit zero economic profit at ATC = Demand

ATC cannot fall below demand curve at any point in this graph

DWL is found at mc=p, mr=mc and Pf

Monopolistic Competition

short to long run

Profit edition

when making profit→ more firms enter the market = more competition → MR and Demand shift to the left = breaking even → demand is more elastic = more substitutes are available

Monopolistic Competition

short to long run

Loss edition

firms exit the market → each firm has more of the market demand = more consumers → Demand increases = breaks even → demand is less elastic

Firms’ efficiency

Perfect competition: Productively efficient

Allocatively efficient

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Monopolistic Competition: not productively efficent not allocatively efficient [P ≠ minATC] [P ≠ MC]

---

Monopoly: not allocatively efficient [P ≠ MC]

The benefit of monopolistic competition is

Variety: product differences might negate inefficiencies

Monopolistic Competition

Changes in fixed cost

In short run only

1. lump sum tax

2. lump sum subsidy

3. change in rent

4. advertising

→ point is to shift demand right = less elastic D

Monopolistic Competition

Changes in fixed cost

Graph

Increase in fixed cost: ATC shifts up = loss

Decrease in fixed cost: ATC shifts down =profit

Monopolistic Competition

Changes in variable cost

Types

also only in short run

1. per unit tax

2. per unit subsidy

3. changes in wages

→ will shift ATC and MC

Monopolistic Competition

Changes in variable cost

Graph

increase in variable cost: MC n ATC shift up → so new mr=mc → higher price lower Q → economic loss

decrease in variable cost: MC n ATC shift down → new mr=mc → lower price higher Q → economic profit

Imperfect competition

Types

monopoly

oligopoly

monopolistic competition

Which of the following characteristics determines whether or not a firm will earn long-run economic profit?

barriers to entry

low= zero

high= positive profit

Oligopoly

1. Few sellers

2. High barriers to entry

3. High start-up cost

4. Government regulations

5. Established costumer loyalty

6. identical or differentiated products

7. long run profit can be positive

Monopoly

1. Only seller

2. High barriers [almost impossible]

3. unique good [no subsititutes]

4. Pricing power 100% [due to 2&3]

Firm demand curve

Perfect comp. vs Imperfect comp.

horizontal demand

price takers

→ inc price = sell zero output

→ dec price = sell same Q but at a profit loss

---

Downward sloping curve

→ inc = less output sold + vice verse\

Demand curve

Imperfect comp. Firms

MR is below demand

D=P=AR

Allocatively efficient

P=MC

Perfect Competition

1. millions of competitors

2. Identical products

3. no barriers

4. no price control

5. zero economic profit

Most competitive firms to least

perfect comp. → monopolistic → oligopoly → monopoly

a firm’s demand curve is the market demand curve

firm is a price maker