Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Guidelines and tips
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Chapter 5-Pure monopoly, Slides of Microeconomics
Pure monopoly refers to a type of economic market. It is a situation in which a single corporation controls the whole supply of goods or services. In a pure monopoly, only one company exists, and it determines all terms, conditions, rules, and pricing. It develops when a single company dominates a product’s market
Typology: Slides
2021/2022
1 / 71
This page cannot be seen from the preview
Don't miss anything!
Related documents
Partial preview of the text
Download Chapter 5-Pure monopoly and more Slides Microeconomics in PDF only on Docsity!
Chapter 5
PURE COMPETITION
Dr. Nguyen Bich Diep [email protected]
PURE COMPETITION
- A firm in a perfectly competitive market knows it has no influence over the market price for its product. The firm is a market price-taker.
y $/output unit
Market Supply
pe p’ p” At a price of p” the firm faces the entire market demand. At a price of p’, zero is demanded from the firm.
Market Demand
PURE COMPETITION
y $/output unit
Market Supply
pe p’ p” At a price of p” the firm faces the entire market demand. At a price of p’, zero is demanded from the firm.
Market Demand
PURE COMPETITION
THE FIRM’S SHORT-RUN SUPPLY DECISION
- Profit maximization problem facing a competitive firm: max ( ) ( ). y s s y py c y = − 0
- Interior solution: the first-order condition is:
THE FIRM’S SHORT-RUN SUPPLY DECISION
$/output unit y pe y’ At y = y s *, p = MC and MC slopes upwards. y = y s
- is profit-maximizing. So a profit-max. supply level can lie only on the upwards sloping part of the firm’s MC curve. MCs(y) ys*
THE FIRM’S SHORT-RUN SUPPLY DECISION
- For the interior case of y s * > 0, the second-order condition is
- That is,
THE FIRM’S SHORT-RUN SUPPLY DECISION
( ) d y dy d dy p MC y dMC y dy
s
s
s
0 ( ) ( ) ( ) = − = − . dMC y dy
s s
( ) .
0
THE FIRM’S SHORT-RUN SUPPLY DECISION
- So the firm will choose an output level y > 0 only if
- i.e., only if Equivalently, only if s v ( y ) = py − F − c ( y ) − F. py c y v − ( ) 0 p c y y AVC y
v
s
= ( ) ( ).
AVCs(y) ACs(y) MCs(y) The firm’s short-run supply curve $/output unit y p AVC s (y) y s
p AVC s (y) y s
THE FIRM’S SHORT-RUN SUPPLY DECISION
THE FIRM’S SHORT-RUN SUPPLY DECISION
- Shutdown is not the same as exit. Shutdown means producing no output (but the firm is still in the industry and incurs fixed cost). Exit means leaving the industry, which the firm can do only in the long-run.
- The long-run is the circumstance in which the firm can choose amongst all of its short-run circumstances.
- How does the firm’s long-run supply decision compare to its short-run supply decisions?
THE FIRM’S LONG-RUN SUPPLY DECISION
- A competitive firm’s long-run profit function is
- The long-run cost c(y) of producing y units of output consists only of variable costs since all inputs are variable in the long-run. ( y ) = py − c y( ).
THE FIRM’S LONG-RUN SUPPLY DECISION
- Additionally, the firm’s economic profit level must not be negative since then the firm would exit the industry. So, ( ) ( ) ( ) ( ). y py c y p c y y AC y = − = 0
MC(y)
AC(y)
y
$/output unit