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Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
End Show
7-1
7
Pure
Competition
and Pure
Monopoly
Copyright 2011 The McGraw-Hill Companies
Chapter Objectives
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
End Show
7-2
• Names and Main Characteristics of
the Four Basic Market Models
• Conditions for Perfect Competition
• How Do Purely Competitive Firms
Maximize Profits or Minimize Losses
• Why the Marginal Cost and Supply
Curves For Competitive Firms Are
Identical
• Characteristics of Pure Monopoly
• How Pure Monopoly Sets Profit
Maximizing Output and Price
• The Economic Effects of Monopoly
• Regulated monopoly markets
Copyright 2011 The McGraw-Hill Companies
Four Market Models
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
•
•
•
•
Pure Competition
Pure Monopoly
Monopolistic Competition
Oligopoly
Imperfect Competition
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Key Terms
Market Structure Continuum
End Show
7-3
Copyright 2011 The McGraw-Hill Companies
Pure Competition
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
•
•
•
•
•
Very Large Numbers
Standardized Product
“Price Takers”
Free Entry and Exit
Perfectly Elastic Demand
–Average Revenue
–Total Revenue
–Marginal Revenue
Graphically…
Key Terms
End Show
7-4
Copyright 2011 The McGraw-Hill Companies
Pure Competition
R1179
Key Terms
P
Firm’s
Revenue
Data
917
QD TR
R131 0
131 1
131 2
131 3
131 4
131 5
131 6
131 7
131 8
131 9
131 10
TR
1048
R0
131
262
393
524
655
786
917
1048
1179
1310
MR
] R131
] 131
] 131
] 131
] 131
] 131
] 131
] 131
] 131
] 131
Price and Revenue
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Firm’s
Demand
Schedule
(Average
Revenue)
786
655
524
393
262
D = MR = AR
131
2
4
6
8
10
Quantity Demanded (Sold)
End Show
7-5
Copyright 2011 The McGraw-Hill Companies
12
Profit Maximization in the
Short Run
Total Revenue-Total Cost Approach
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
Consider:
–Should Product Be
Produced?
–If So, In What Amount?
–What Economic Profit
(Loss) Will Be Realized?
End Show
7-6
Copyright 2011 The McGraw-Hill Companies
Profit Maximization in the
Short Run
Total Revenue-Total Cost Approach
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
Price = R131
(1)
Total Product
(Output) (Q)
0
1
2
3
4
5
6
7
8
9
10
(2)
Total Fixed
Cost (TFC)
(3)
Total Variable
Cost (TVC)
R100
100
100
100
100
100
100
100
100
100
100
R0
90
170
240
300
370
450
540
650
780
930
(4)
(5)
(6)
Total Cost Total Revenue Profit (+)
(TC)
(TR)
or Loss (-)
R100
190
270
340
400
470
550
640
750
880
1030
R0
131
262
393
524
655
786
917
1048
1179
1310
R-100
-59
-8
+53
+124
+185
+236
+277
+298
+299
+280
Do
You
SeeGraph
Profit The
Maximization?
Now
Let’s
Results…
End Show
7-7
Copyright 2011 The McGraw-Hill Companies
Profit Maximization in the Short Run
Total Revenue-Total Cost Approach
Total Revenue and Total Cost
Total Economic
Profit
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
R1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
Key Terms
End Show
7-8
Break-Even Point
(Normal Profit)
Total Revenue, (TR)
Maximum
Economic
Profit
R299
Total Cost,
(TC)
P=R131
Break-Even Point
(Normal Profit)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity Demanded (Sold)
R500
400
300
200
100
Total Economic
Profit
R299
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity Demanded (Sold)
Copyright 2011 The McGraw-Hill Companies
Profit Maximization in the Short Run
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
Marginal Revenue-Marginal Cost Approach
MR = MC Rule
Important Features:
• Firm Will Shut Down
Unless MR at Least Meets
MC
• Profit Maximization in All
Market Structures
• Can Be Restated P = MC
End Show
7-9
Copyright 2011 The McGraw-Hill Companies
Profit Maximization in the
Short Run
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
Marginal Revenue-Marginal Cost Approach
MR = MC Rule
(1)
Total
Product
(Output)
0
1
2
3
4
5
6
7
8
9
10
(2)
Average
Fixed
Cost
(AFC)
R100.00
50.00
33.33
25.00
20.00
16.67
14.29
12.50
11.11
10.00
(3)
Average
Variable
Cost
(AVC)
(4)
Average
Total
Cost
(ATC)
R90.00 R190.00
85.00 135.00
80.00 113.33
75.00 100.00
74.00
94.00
75.00
91.67
77.14
91.43
81.25
93.75
86.67
97.78
93.00 103.00
(5)
Marginal
Cost
(MC)
R90
80
70
60
70
80
90
110
130
150
(6)
Marginal
Revenue
(MR)
(7)
Profit (+)
or Loss (-)
R131
131
131
131
131
131
131
131
131
131
R-100
-59
-8
+53
+124
+185
+236
+277
+298
+299
+280
Surprise
- Now
Let’s GraphNow?
It…
DoNo
You
See Profit
Maximization
End Show
7-10
Copyright 2011 The McGraw-Hill Companies
Profit Maximization in the
Short Run
7.2
R200
Cost and Revenue
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Marginal Revenue-Marginal Cost Approach
MR = MC Rule
150
MR = MC
P=R131
MC
MR = P
ATC
Economic Profit
100
AVC
A=R97.78
50
Key Terms
0
End Show
1
2
3
4
5
6
Output
7-11
Copyright 2011 The McGraw-Hill Companies
7
8
9
10
Profit Maximization in the
Short Run
Loss Minimizing Case
R200
Cost and Revenue
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Marginal Revenue-Marginal Cost Approach
MR = MC Rule
Lower the Price to R81 and
Observe the Results!
150
MC
Loss
A=R91.67
ATC
AVC
100
MR = P
P=R81
50
V = R75
Key Terms
0
End Show
1
2
3
4
5
6
Output
7-12
Copyright 2011 The McGraw-Hill Companies
7
8
9
10
Profit Maximization in the
Short Run
Short-Run Shut Down Case
R200
Cost and Revenue
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Marginal Revenue-Marginal Cost Approach
MR = MC Rule
Lower the Price Further to
R71 and Observe the Results!
MC
150
ATC
V = R74
100
AVC
MR = P
50
P=R71
Short-Run
Shut Down Point
P < Minimum AVC
R71 < R74
Key Terms
0
End Show
1
2
3
4
5
6
Output
7-13
Copyright 2011 The McGraw-Hill Companies
7
8
9
10
Marginal Cost and
Short-Run Supply
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
End Show
7-14
Continuing the Same Numeric
Example…
Supply Schedule of a Competitive Firm
Quantity
Maximum Profit (+)
Price
Supplied
or Minimum Loss (-)
R151
10
R+480
131
9
+299
111
8
+138
91
7
-3
81
6
-64
71
0
-100
61
0
-100
The Schedule Shows the Quantity a Firm
Will Produce at a Variety of Prices and Results
Copyright 2011 The McGraw-Hill Companies
Marginal Cost and
Short-Run Supply
Generalizing the MR=MC
Relationship and its Use
Cost and Revenues (Dollars)
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
e
P5
MR5
d
P4
ATC
c
P3
P2
P1
AVC
b
a
This Price is Below AVC
And Will Not Be Produced
Key Terms
0
End Show
Q2
Q3
Q4
Quantity Supplied
7-15
Copyright 2011 The McGraw-Hill Companies
MC
Q5
MR4
MR3
MR2
MR1
Marginal Cost and
Short-Run Supply
Generalizing the MR=MC
Relationship and its Use
Examine the MC for the Competitive Firm
Cost and Revenues (Dollars)
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
MC Above AVC Becomes
the Short-Run Supply Curve S
Break-even
(Normal Profit) Point
P5
P4
Key Terms
AVC
b
a
0
Shut-Down Point
(If P is Below)
Q2
Q3
Q4
Quantity Supplied
7-16
ATC
c
P3
P2
P1
Copyright 2011 The McGraw-Hill Companies
MC
MR5
d
This Price is Below AVC
And Will Not Be Produced
End Show
e
Q5
MR4
MR3
MR2
MR1
Characteristics of Monopoly
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
•
•
•
•
•
•
Single Seller
No Close Substitutes
“Price Maker”
Blocked Entry
Nonprice Competition
Examples
–Regulated Monopolies
–Near-Monopolies
–SAB - De Beers
• Dual Objectives of Study
End Show
7-17
Copyright 2011 The McGraw-Hill Companies
Monopoly Demand
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
• Monopoly Status is
Secure
• No Governmental
Regulation
• Firm is a Single-Price
Monopolist (No Price
Discrimination)
End Show
7-18
Copyright 2011 The McGraw-Hill Companies
Price and Marginal Revenue
Marginal Revenue is Less Than Price
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
• A Monopolist is
Selling 3 Units
at R142
• To Sell More (4),
Price Must Be
Lowered to
R132
• All Customers
Must Pay the
Same Price
• TR Increases
R132 Minus R30
(3xR10)
R142
132
17
112
End Show
7-19
Copyright 2011 The McGraw-Hill Companies
D
102
Gain = R132
92
82
0
Key Terms
Loss = R30
1
2
3
4
5
6
Price and Marginal Revenue
Marginal Revenue is Less Than Price
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
• A Monopolist is
Selling 3 Units at
R142
• To Sell More (4), R142
Price Must Be
Lowered to R132 132
17
• All Customers
Must Pay the Same 112
Price
102
• TR Increases R132
92
Minus R30 (3xR10)
82
• R102 Becomes a
Point on the MR
Curve
• Try Other Prices to
Determine Other
0
MR Points
Loss = R30
D
Gain = R132
MR
1
2
3
4
5
6
The Constructed Marginal Revenue Curve
Must Always Be Less Than the Price
End Show
7-20
Copyright 2011 The McGraw-Hill Companies
Monopoly Revenue and Costs
Revenue and Cost Data of a Pure
Monopolist
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
Cost Data
Revenue Data
(2)
Price
(1)
Quantity (Average
Of Output Revenue)
0
1
2
3
4
5
6
7
8
9
10
R172
162
152
142
132
17
112
102
92
82
72
(3)
Total
Revenue
(1) X (2)
R0 ]
162 ]
304 ]
426 ]
528 ]
610 ]
672 ]
714 ]
736 ]
738 ]
720
(4)
Marginal
Revenue
R162
142
17
102
82
62
42
7
2
-18
(5)
(6)
(7)
(8)
Average Total Cost Marginal Profit (+)
Total Cost (1) X (5)
Cost
or Loss (-)
R190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.75
97.78
103.00
R100 ]
190 ]
270 ]
340 ]
400 ]
470 ]
550 ]
640 ]
750 ]
880 ]
1030
R90
80
70
60
70
80
90
110
130
150
R-100
-28
+34
+86
+128
+140
+17
+74
-14
-142
-310
Can you See Profit Maximization?
End Show
7-21
Copyright 2011 The McGraw-Hill Companies
Monopoly Revenue and Costs
Demand, Marginal Revenue, and Total Revenue
for a Pure Monopolist
Key Terms
End Show
R200
Price
150
100
50
D
MR
0
4
6
8
10
12
Total-Revenue Curve
14
16
18
500
250
0
7-22
2
R750
Total Revenue
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Demand and Marginal Revenue Curves
Elastic
Inelastic
TR
2
Copyright 2011 The McGraw-Hill Companies
4
6
8
10
12
14
16
18
Monopoly Revenue and Costs
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
• Monopolist is a Price
Maker
• Sets Price in the Elastic
Region
• Output and Price
Determination
–Cost Data
–MR = MC Rule
• No Supply Curve
End Show
7-23
Copyright 2011 The McGraw-Hill Companies
Profit Maximization
By A Pure Monopolist
R200
Price, Costs, and Revenue
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
175
MC
150
Pm=R17
125
100
75
Economic
Profit
ATC
A=R94
D
MR=MC
50
25
Key Terms
0
MR
1
2
3
4
5
6
Quantity
End Show
7-24
Copyright 2011 The McGraw-Hill Companies
7
8
9
10
Misconceptions
Concerning Monopoly Pricing
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
• Not the Highest Price
• Total, Not Unit, Profit
• Possibility of Losses
Key Terms
End Show
7-25
Copyright 2011 The McGraw-Hill Companies
Economic Effects of
Monopoly
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Price, Output, and Efficiency
Pure
Monopoly
Purely
Competitive
Market
S=MC
MC
Pm
P=MC=
Minimum
ATC
Pc
b
c
Pc
a
D
D
MR
Qc
Qm
Qc
Pure Competition is Efficient
Monopoly Price is Greater Than MC
And Is Therefore Inefficient
Key Terms
End Show
7-26
Copyright 2011 The McGraw-Hill Companies
Economic Effects of
Monopoly
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Price, Output, and Efficiency
• Income Transfer
• Cost Complications
• Economies of Scale
– Simultaneous Consumption
– Network Effects
Key Terms
End Show
7-27
Copyright 2011 The McGraw-Hill Companies
Regulated Monopoly
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Key Terms
• Natural Monopolies
• Rate Regulation
• Socially Optimum Price
P = MC
• Fair Return Price
P = ATC
End Show
7-28
Copyright 2011 The McGraw-Hill Companies
Regulated Monopoly
Dilemma of Regulation
Monopoly
Price
Price and Costs (Dollars)
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Pm
Fair-Return
Price
f
Pf a
ATC
Pr
r
0
b
Qm
Qf
Quantity
End Show
7-29
Copyright 2011 The McGraw-Hill Companies
MC
D
MR
Key Terms
Socially
Optimal
Price
Qr
De Beers Diamonds
Are Monopolies Forever?
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
• 66 Year Policy of
Monopolizing the Diamond
Trade
• Mid-2000 Abandoned
Monopoly Efforts
• Decline in Number of Select
Dealers and Cutters
• Classic Monopoly Behavior
– Pricing
– Single-Channel Marketing
Key Terms
End Show
7-30
Copyright 2011 The McGraw-Hill Companies
De Beers Diamonds
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
•
•
•
•
•
Key Terms
•
End Show
7-31
Are Monopolies Forever?
End of an Era
New Diamond DiscoveriesAngola, Canada
Australian Producer Withdrew
Bad Press and Public
Perception Over Civil Strife
Financing Role
Becoming Cartel of
Specialized High-End
Diamonds
Monopoly Didn’t Last Forever!
Copyright 2011 The McGraw-Hill Companies
Key Terms
Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
• pure competition
• pure monopoly
• monopolistic
competition
• oligopoly
• imperfect
competition
• price taker
• average revenue
• total revenue
• marginal revenue
Key Terms
End Show
7-32
Copyright 2011 The McGraw-Hill Companies
• break-even point
• MR=MC
• short-run supply
curve
• pure monopoly
• price maker
• Economic effects
of monoppoly
• regulated
monopoly
• fair-return price
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Four Market
Models
Pure Competition
Profit
Maximization in
the Short-Run
Marginal Cost
and Short-Run
Supply
Pure Monopoly
Profit Maximizing
Output and
Price in
Monopoly
Economic effects
of a monopoly
Regulated
Markets
Last Word
Monopolistic
Competition
and Oligopoly
Key Terms
End Show
7-33
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