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Contemporary Economics:
An Applications Approach
By Robert J. Carbaugh
1st Edition
Chapter 5:
Competition and Monopoly:
Virtues and Vices
Copyright ©2001, South-Western College Publishing
Perfect Competition
Price
Market equilibrium facing competitive firm
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
Market supply
Market demand
0
1,400,000
2,800,000
Quantity of fish (lbs.)
Carbaugh, Chap. 5
2
Perfect Competition
Demand and revenue for a competitive firm
Demand and Marginal Revenue
for one company
$ 15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
Total revenue
$ 70
63
Total
revenue
56
49
Demand = P = MR
42
35
28
21
7
14
1
7
0
0
2
4
6
8
Quantity of fish (lbs.)
Carbaugh, Chap. 5
10
12
0
1
2
3
4
5
6
7
8
9 10 11 12
Quantity of fish (lbs.)
3
Perfect Competition
Short-run economic profit/loss for a competitive firm
Profit maximization
$ 9.00
MC
8.00
A
7.00
6.00
5.00
Demand
= P = MR
ATC
Total profit
= $2,500
4.00
Loss minimization
$ 8.00
Total loss
= $2,128
7.00
MC
ATC
6.00
5.33
5.00
AVC
Demand
= P = MR
4.00
3.00
3.00
2.00
2.00
1.00
1.00
0.00
0.00
0
500 1000 1500 2000 2500 3000 3500
Quantity of fish (lbs.)
Carbaugh, Chap. 5
0
700
1600
3000
Quantity of fish (lbs.)
4
Perfect Competition
Short-run supply curves for a competitive
firm and market
Individual firm’s supply curve
$6
Firm’s short-run
supply curve
Market supply curve
$6
Market’s shortrun supply curve
MC
4
Supply
4
AVC
2
2
0
0
0
700
1600
Quantity of fish (lbs.)
Carbaugh, Chap. 5
2000
0
700,000
1,600,000
Quantity of fish (lbs.)
5
Perfect Competition
Price
Market
S0
7
S1
6
Price and cost
Long-run adjustments for a competitive firm:
effects of market entry
Individual firm
7
Demand0 = Price0
6
LRATC
5
A
5
Demand1 = Price1
D0
4
4
0
0
Quantity of fish (lbs.)
Carbaugh, Chap. 5
500
Quantity of fish (lbs.)
6
Perfect Competition
Price
Market
S1
6
S2
5
Price and cost
Long-run adjustments for a competitive firm:
effects of market exit
Individual firm
6
LRATC
A
5
4
Demand1 = Price1
4
Demand2 = Price2
D0
3
3
0
0
Quantity of fish (lbs.)
Carbaugh, Chap. 5
500
Quantity of fish (lbs.)
7
Monopoly
Economies of scale and natural monopoly
Hypothetical electric
utility’s cost curve
13¢
12¢
B
11¢
10¢
9¢
8¢
A
7¢
ATC
6¢
0
1
2
3
4
5
6
7
8
Million KWHs
Carbaugh, Chap. 5
8
Monopoly
Price and marginal revenue for a monopolist
Demand and revenue
schedules for a monopolist
Quantity
Price
(dollars)
0
1
2
3
4
5
6
4,000
3,600
3,200
2,800
2,400
2,000
1,600
Total
Marginal
Revenue Revenue
0
3,600
6,400
8,400
9,600
10,000
9,600
0
3,600
2,800
2,000
1,200
400
-400
$ 4,400
4,000
3,600
3,200
2,800
2,400
2,000
1,600
1,200
800
400
MR
Demand
= Price
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of diamonds
Carbaugh, Chap. 5
9
Monopoly
Profit maximization/loss minimization for a monopolist
Profit maximization
Loss minimization
$ 4400
$ 4400
4000
4000
Profits =
$3,200
3600
3600
3200
3200
MC
2800
1600
ATC
2400
2000
B
MC
A
2800
A
2400
Losses
= $1,600
ATC
C
2000
AVC
B
1600
1200
1200
800
Demand
= Price
400
MR
0
0
1 2
3
4
5 6
Demand
= Price
400
MR
0
7
8
Quantity of Diamonds
Carbaugh, Chap. 5
800
9 10 11
0
1 2
3
4
5 6
7
8
9 10 11
Quantity of Diamonds
10