Download LONG RUN COMPETITIVE EQUILIBRIUM

LONG RUN COMPETITIVE
EQUILIBRIUM
One Price Monopoly Versus
Perfect Competition
Price Discrimination Prices and
Output
EFFICIENCY AND COMPETITION
• P = MC: Allocative efficiency
– What people are willing to give up equals
what people must give up
• P = min ATC: Productive efficiency
– The commodity is produced at the lowest
possible price. Output per input is maximized.
• All costs must be paid by the firm.
• All benefits must be enjoyed by the
consumer
Monopoly in Long-run Equilibrium
Efficiency and Monopoly
• P>MC: No allocative efficiency
– People are willing to give up more than must
be given up.
• P>min ATC: No productive efficiency
– The commodity is not produced at the lowest
possible price. Output per input is not
maximized
• The firm may earn more profits than
necessary in the long-run
Monopolistic competition in shortrun equilibrium
Efficiency and Monopolistic
Competition in the short-run
• P>MC: No allocative efficiency
– People are willing to give up more than must
be given up.
• P>min ATC: No productive efficiency
– The commodity is not produced at the lowest
possible price. Output per input is not
maximized
• BUT the profits will not persist in the
long-run
Monopolistic competition in Longrun Equilibrium
Efficiency and Monopolistic
Competition in the long-run
• P>MC: No allocative efficiency
– People are willing to give up more than must be given
up.
• P>min ATC: No productive efficiency
– The commodity is not produced at the lowest possible
price. Output per input is not maximized
• BUT the profits have been reduced to a
normal return. Alternative opportunities are
covered and no more.
NO DEAD WEIGHT LOSS IN
PERFECT COMPETION
PRICE
S= SUM OF MC’s
CS
P
PS
D
Q
QUANTITY
DEAD WEIGHT LOSS IN
MONOPOLY OR MONOPOLISTIC
COMPETION
PRICE
MC
P
DEAD
WEIGHT
LOSS
CS
P =MC
PS
MR
Q
D
QUANTITY
Dead Weight Loss In Monopolistic
Competition with Close Substitutes
PRICE
MC
CS
DEAD
WEIGHT
LOSS
P
P=mc
D
PS
MR
Q
QUANTITY
Monopolistic Competition and
Perfect Competition
• In monopolistic competition, products may have
very close substitutes.
• The closer the substitute the more elastic the
demand curve. (The less the firm can raise price
without customers going to the substitute.)
• The price set by the firm maybe very close to the
MC and the deadweight loss may be small
– (Consumer surplus is small, because the benefit from
a Louis’s pizza is very little more than the benefit from
a Wheel pizza, for most consumers.)
How bad is monopolistic
competition?
• If each firm has very close substitutes, the
price charged by the monopolistically
competitive firm will be very close to the
price which equates price and marginal
cost.
• Firms often compete by introducing
products which are similar to successful
products of competitors
Circumstances of Monopolistic
Competition
• Each firm has excess capacity, and would
like to sell more at the price they have
set.
• Each firm wants to shift its demand curve
out.
• Each firm wants to make its demand curve
more inelastic
– They want to be able to raise their price and
lose fewer customers.
Dynamics of Monopolistic
Competition
• Firms want a larger demand for their
product. If their demand shifts out, their
profits will rise.
• Firms want a more inelastic demand
curve. If they can raise the price with only
a small decline in quantity sold, their
profits will rise
Dynamic Monopolistic competition
• Firms ADVERTISE.
– They hope to increase demand – shift the demand
curve out.
– They hope to create brand name loyalty – Only Nike
shoes will due, no matter what they cost.
• Firms DEVELOP more appealing products.
–
–
–
–
Low fat subway sandwiches
Blueberry messenger systems
Running shoes with air cushions in them
If Elton John or Ashley MacIsaac are not longer hot,
perhaps Avril or David Matthews will have a big
market.
Advertising and Product
Development
• Both add to the costs of the firms
• If successful, they add to the revenues of
the firms
• Firms must balance the addition to costs
against the anticipated addition to
revenues
Workings of Capitalism
• If there is entry to an industry, excess
profits will be competed away.
• Competition in the music, book, and film
industry as well as in fast foods and
running shoes takes the form of
developing new products and advertising
them.
• P > MC but variety is the spice of life.
Drug Companies
• Even here, firms have the incentive to
develop new products which may be
useful.
• If one drug is highly successful and
profitable, other firms may develop similar
products that do not infringe on patents, if
possible.
– There are many drugs that lower cholesterol.
• (But I’m not sure we achieve the best possible
results.)