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Competition and Market
Structures
Class 4
Ref: Some Basic Microeconomic Tools. Chapter 2. Industrial
Organization – Contemporary Theory & Practice. Third Edition.
Pepall – Richards - Norman. Thomson Ed. pp. 20-45
Industrial Economics
Flavio Pinto
Contents
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The Demand Function
Profit
Profit Maximization
Market Poles
Competitive Markets
Monopoly Markets
Efficiency and Surplus
Contents
The Demand Function
q:
Q:
P

Q
Basics about Demand
Profit

Profit:  q  
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Revenue:

Cost:
Applicable to all market
Profit Maximization
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Firm’s Objective:

Derivatives:
$
q
Applicable to all markets
Market Poles:
Competitive and Monopoly
P
P
q
Q
Market Poles
Competitive Markets
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Firms are price takers
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Maximization:
$
q
Competitive Markets
Exercise 1 (p. 25)
$

Cellular phones
Q=
TC = 100 + q2 +10q
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Show that a firm industry maximizes
profit by producing…
Derive the industry supply curve
Find the market price and the aggregate
quantity traded in equilibrium
q
Competitive Markets
Monopoly Markets
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Monopolies impose the price
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Marginal Revenue
$/unit
Q
Monopoly Markets
Monopoly Markets
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Maximization of Profit
$/unit
Q
Monopoly Markets
Exercise 2 (p. 30)
$
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Cellular phones
Q=
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Show that a MR function is:
q

Show that the profit maximzing is>
Competitive Markets
Efficiency and Surplus
$
Q
Efficiency and Surplus
Efficiency and Surplus:
Competitive and Monopoly
P
P
Q
Q
Market Poles
Exercise 3 (p. 40)
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Water is produced and sold by the government
Q = 50 - 2P
TC = 100 + 10q
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How much should the government charge per unit of water in order to
reach the efficient allocation?
How much if it searches to maximize the profit?
What is the efficiency lost?
Competitive Markets