\
\
\
]]Daily bushels of carrots (q)]] | ]]Price (P)]] | ]]Total revenue]] | ]]Total cost]] | ]]Profit]] |
---|---|---|---|---|
0 | $11 | $0 | $16 | -$16 |
1 | $11 | $11 | $22 | -$11 |
2 | $11 | $22 | $27.50 | -$5.50 |
3 | $11 | $33 | $34 | -$1 |
4 | $11 | $44 | $42 | $2 |
5 | $11 | $55 | $53 | $2 |
6 | $11 | $66 | $65 | $1 |
\
1. Choose the level of output where MR = MC
]]Daily bushels of carrots (q)]] | ]]Price (P)]] | ]]Total revenue]] | ]]Total cost]] | ]]Profit]] | ]]Marginal revenue]] | ]]Marginal cost]] |
---|---|---|---|---|---|---|
0 | $11 | $0 | $16 | -$16 | ||
1 | $11 | $11 | $22 | -$11 | $11 | $6 |
2 | $11 | $22 | $27.50 | -$5.50 | $11 | $5.50 |
3 | $11 | $33 | $34 | -$1 | $11 | $6.50 |
4 | $11 | $44 | $42 | $2 | $11 | $8 |
5 | $11 | $55 | $53 | $2 | $11 | $11 |
6 | $11 | $66 | $65 | $1 | $11 | $12 |
Since MR=MC at 5 bushels of carrot, the farmer would grow that level
Price = Marginal revenue in perfectly competitive market structures
This is because Farmers can sell as much as they want at the market price hence earn the same amount of marginal revenue
Price is also equivalent to average revenue (AR), or total revenue per unit
]]Daily bushels of carrots (q)]] | ]]Price (P)]] | ]]Total cost]] | ]]Average total cost]] | ]](P-ATC)]] | ]]Profit]] |
---|---|---|---|---|---|
0 | $11 | $16 | $16 | -$16 | |
1 | $11 | $22 | $22 | -$11 | -$11 |
2 | $11 | $27.50 | $27.50 | -$2.75 | -$5.50 |
3 | $11 | $34 | $34 | -$.33 | -$1 |
4 | $11 | $42 | $42 | $.50 | $2 |
5 | $11 | $53 | $53 | $.40 | $2 |
6 | $11 | $65 | $65 | $.17 | $1 |
]]Daily bushels of carrots (q)]] | ]]Price (P)]] | ]]Total revenue]] | ]]Total cost]] | ]]profit]] | ]]Marginal revenue]] | ]]marginal cost]] |
---|---|---|---|---|---|---|
0 | $6.50 | $0 | $16 | -$16 | ||
1 | $6.50 | $6.50 | $22 | -$15.50 | $6.50 | $6 |
2 | $6.50 | $13 | $27.50 | -$14.50 | $6.50 | $5.5 |
3 | $6.50 | $19.50 | $34 | -$14.50 | $6.50 | $6.5 |
4 | $6.50 | $26 | $42 | -$16 | $6.50 | $8 |
5 | $6.50 | $32.50 | $53 | -$20.50 | $6.50 | $11 |
6 | $6.50 | $39 | $65 | -$26 | $6.50 | $12 |
MR=MC at 3 bushels now, however the carrot farmer would now face economic losses instead
At this point however, the farmer is able to minimize losses the most at this level
This becomes the loss minimizing level for him
Total revenue is generated
Total variable cost is incurred (fixed cost is incurred irrespective of output)
Since the market price is above ATC, the firms in the market are earning a short term profit
In the long run however, seeing the success of the firms in the market, more firms join in
As more firms join in, the supply gradually increases because of which the market price comes down
As the market price comes down, firms already in the market begin to make less and less profit until there is no profit at all
At the point where P = MR = MC = ATC, each carrot farmer is now breaking even with π = 0
This breakeven point is described as the long-run equilibrium
Market quantity increases and Individual producer output falls.
]]When the short run]] | ]]The firm produces where]] | ]]Short-run economic profit are]] | ]]In the long run]] | ]]The long-run outcome is]] |
---|---|---|---|---|
P>ATC | MR=MC | + | Firms enter | Plr = MR = MC = ATC and profit =0 |
P=ATC | MR=MC | zero, breakeven | no entry/exit | Plr = MR = MC = ATC and profit =0 |
AVC < P < ATC | MR=MC | - (0<profit<-TFC) | firms exit | Plr = MR = MC = ATC and profit =0 |
P < AVC | zero, shutdown | -(=TFC) | firms exit | Plr = MR = MC = ATC and profit =0 |
A single producer
No close substitutes
Barriers to entry
Market power
]]P]] | ]]Q]] | ]]TR]] | ]]MR]] |
---|---|---|---|
7 | 0 | 0 | |
6 | 1 | 6 | 6 |
5 | 2 | 10 | 4 |
4 | 3 | 12 | 2 |
3 | 4 | 12 | 0 |
2 | 5 | 10 | -2 |
1 | 6 | 6 | -4 |
0 | 7 | 0 | -6 |
Price > marginal revenue because the monopolist must lower price to boost sales
Added revenue from selling one more unit is the price of the last unit less the sum of the price cuts that must be taken on all prior units of output
Demand is elastic above the midpoint of a linear demand curve, hence price decrease increases total revenue
Demand is inelastic below the midpoint, hence price decrease decreases total revenue
Total revenue is maximized at the midpoint and demand here is unit elastic
Monopolists would avoid the inelastic portion of the demand curve and produce somewhere left of the midpoint
As visible from the curve, marginal revenue is zero when total revenue is maximized
Further price cuts decrease total revenue, making marginal revenue negative
The firm must set output at the level where MR = MC. At this level of output (Qm), the monopolist sets the price (Pm) from the demand curve
Monopoly profits are due to the entry barrier, to last into the long run
Incase demand plummets or perhaps production costs increase, to the point where P < ATC and losses are incurred, monopolist would leave the market if situation continues
Allocative efficiency is achieved when the market produces a level of output where the marginal cost (MC) to society exactly equals the marginal benefit (P) received by society
Total welfare is maximized at that level and any movement from the output would result in deadweight losses
Productive efficiency is achieved if society has produced a level of output with the lowest possible cost
In perfect competition, allocative efficiency is achieved in the long run where P = MR = MC at Q
Productive efficiency is achieved because firms produce at minimum ATC, once entry or exit has occurred in the long term
Monopoly doesn’t have both of these
Monopolist produces at a quantity Qm where Pm > MR = MC
This indicates that monopolists purposely don’t produce more, even though demand is there
This is known as market failure
The monopoly output isn’t at point where ATC is minimized;
This explains why monopolist aren’t productively efficient
A profit earned by the monopolist is a transfer of consumer surplus from consumers to the firm
This occurs when the firm is able to charge the maximum possible price from different consumers for the same product
Imagine a scenario where a shop has a system that displays the maximum price each of their customer entering could pay for that product
This maximum price is easily visible to the cashier only and not to the consumer
For each different consumer, the maximum price they could pay would vary and the cashier would charge them that exact maximum price they can afford
The demand curve and marginal revenue are now the same (P = MR) for this
No single equilibrium price, because each customer was charged a different price
The monopolist takes all of it as producer surplus since there isn’t any consumer surplus
Last unit sold is the one for which P = MC, this outcome is allocatively efficient
Just like in a monopoly, demand curve is downward sloping due to their differentiated product
Similar substitutes available to consumers makes demand quite elastic
the firm sets Qmc where MR = MC and sets the price from the demand curve
]]Jack’s choice]] | |||
---|---|---|---|
{{Confess{{ | {{Stay silent{{ | ||
{{Confess{{ | D: fail courseJ: fail course | D: gets BJ: expelled | |
]]Diane’s choice]] | {{Stay silent{{ | D: expelled J: gets B | D: gets DJ: gets D |
\
]]Sloppy’s choice]] | |||
---|---|---|---|
{{burger only{{ | {{Add hot dog{{ | ||
{{Burgers only{{ | $500, $300 | $400,$400 | |
]]Stinky’s choice]] | {{Add hot dog{{ | $600, $200 | $500, $100 |
\
Cartels are groups of firms that create a formal agreement not to compete with each other on the basis of price, production, or other competitive dimensions
Cartels are more organized forms of collusive oligopoly behavior
They collectively operate as a monopolist to maximize their joint profits
Each cartel member agrees to a limited level of output resulting in a higher cartel price
Joint profits are maximized and distributed to each member
\
Difficulty in arriving at a mutually acceptable agreement to restrict output
Punishment mechanism
Entry of new firms
\