Download Pure Competition in the Long Run

Economics 3/20/17
http://mrmilewski.com
• OBJECTIVE: Examine Pure Competition in the long
run. AP Micro-3.9
• Language objective: SWBAT define essential vocabulary in regards
to Micro economics. In addition, swbat write notes on performance
and read and write answers to questions and problems regarding
the objective.
• I. Administrative Stuff
-attendance
-Review Macro Final Exam
• II. Chapter#9 Homework
-Answer questions (1-5) & Problems (1-2) p.193
• Notice: Grades posted to Google classroom tonight.
3rd Hour Google Classroom
q3lae
5th Hour Google Classroom
gsuwytt
Homework
• Answer Questions (1-5)
and Problems (1-2)
p.193
Economics 3/21/17
http://mrmilewski.com
• OBJECTIVE: Examine Pure Competition in the
long run. AP Micro-3.9
• Language objective: SWBAT define essential vocabulary in
regards to Micro economics. In addition, swbat write notes on
performance and read and write answers to questions and
problems regarding the objective.
• I. Daily Opener#59
-ACDC Econ Micro 3.9 Perfect Competition in the
Long Run
-Welker Long Run Video
• II. Notes#59
-notes on pure competition in the long run
• Notice: Chapter#9 Test Thursday
09
Pure Competition in the Long
Run
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Long Run in Pure Competition
• In the long run:
• Firms can expand or contract
capacity
• Firms enter and exit the industry
LO1
9-7
Profit Maximization in the Long Run
• Easy entry and exit
• The only long run adjustment we
•
•
LO2
consider
Identical costs
• All firms in the industry have identical
costs
Constant-cost industry
• Entry and exit do not affect resource
prices
9-8
Long-Run Equilibrium
• Entry eliminates profits
• Firms enter
• Supply increases
• Price falls
• Exit eliminates losses
• Firms exit
• Supply decreases
• Price rises
LO3
9-9
Entry Eliminates Economic Profits
P
P
S1
MC
ATC
$60
50
MR
40
S2
$60
50
D2
40
D1
0
100
(a)
Single Firm
LO3
q
0
80,000 90,000 100,000
Q
(b)
Industry
9-10
Exit Eliminates Losses
P
P
S3
MC
ATC
$60
S1
$60
50
50
MR
D1
40
40
D3
0
100
(a)
Single Firm
LO3
q
0
80,000
90,000
100,000 Q
(b)
Industry
9-11
•
•
•
LO4
Long Run Supply
Constant cost industry
• Entry/exit does not affect LR ATC
• Constant resource price
• Special case
Increasing cost industry
• Most industries
• LR ATC increases with expansion
• Specialized resources
Decreasing cost industry
9-12
LR Supply: Constant-Cost Industry
P
P1
P2 $50
Z3
Z1
Z2
S
P3
D1
D3
0
LO4
Q3
90,000
Q1
100,000
D2
Q2
110,000
Q
9-13
LR Supply: Increasing-Cost Industry
P
S
P2 $55
Y2
P1 $50
Y1
P3 $40
Y3
D2
D1
D3
0
LO4
Q3
90,000
Q1
100,000
Q2
110,000
Q
9-14
LR Supply: Decreasing-Cost Industry
P
P3 $55
X3
X1
P1 $50
X2
P2 $40
D3
S
D2
D1
0
LO4
Q3
90,000
Q1
100,000
Q2
110,000
Q
9-15
Exit Question
• 59.) In pure competition, what is the long run
economic profit?
Homework
• Continue reading
Chapter#9.
Economics 3/22/17
http://mrmilewski.com
• OBJECTIVE: Examine Pure Competition in the
long run. AP Micro-3.9
• Language objective: SWBAT define essential vocabulary in
regards to Micro economics. In addition, swbat write
notes on performance and read and write answers to
questions and problems regarding the objective.
• I. Daily Opener#60
-no daily opener Ch#8 Retake
• II. Notes#60
-notes on pure competition in the long run
• Notice: Chapter#9 Test TOMORROW!
Pure Competition and Efficiency
• In the long run, efficiency is achieved
• Productive efficiency
• Producing where P = min. ATC
• Allocative efficiency
• Producing where P = MC
LO5
9-19
Pure Competition and Efficiency
Single Firm
Market
P=MC=Minimum
ATC (Normal Profit) MC
Consumer
Surplus
S
Price
Price
ATC
P
MR P
Producer
Surplus
D
0
LO5
Qf
Quantity
0
Qe
Quantity
9-20
Dynamic Adjustments
• Purely competitive markets will
•
LO6
automatically adjust to:
• Changes in consumer tastes
• Resource supplies
• Technology
Recall the “Invisible Hand”
9-21
Technological Advance: Competition
• Entrepreneurs would like to increase
profits beyond just a normal profit
• Decrease costs by innovating
• New product development
LO6
9-22
Creative Destruction
• Competition and innovation may lead
to “creative destruction”
• Creation of new products and
methods destroys the old products
and methods
LO6
9-23
Efficiency Gains from Entry
• Patent protected prescription drugs earn
•
substantial economic profits for the
pharmaceutical company.
Generic drugs become available as the
patent expires on the existing drug.
• Results in a 30-40% reduction price
• Greater consumer surplus and
efficiency
9-24
Efficiency Gains from Entry
a
S
P1
b
c
d
f
P2
D
Q1
Q2
9-25
Exit Question
• 60.) When is the Chapter#9 Test?
Homework
• Study for Chapter#9
Test Tomorrow!
Economics 3/23/17
http://mrmilewski.com
• OBJECTIVE: Demonstrate mastery of pure
competition in the long run. AP Micro-3.9
• Language objective: SWBAT define essential vocabulary in
regards to Micro economics. In addition, swbat write
notes on performance and read and write answers to
questions and problems regarding the objective.
• I. Administrative Stuff
-attendance & review
• II. Chapter#9 Test
-test on pure competition in the long run
• Homework: Begin Reading Chapter#10
Homework
• Begin Reading
Chapter#10
Economics 3/24/17
http://mrmilewski.com
• OBJECTIVE: Examine Pure Monopoly. AP Micro4.1
• Language objective: SWBAT define essential vocabulary in
regards to Micro economics. In addition, swbat write notes on
performance and read and write answers to questions and
problems regarding the objective.
• I. Daily Opener#61
-ACDC Econ Micro 4.1 Monopoly Demand & MR
-ACDC Econ Micro 4.2 Monopoly Graph
• II. Notes#61
-notes monopoly
• Notice: Read Chapter#10
10
Pure Monopoly
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
An Introduction to Pure Monopoly
•
•
•
•
•
LO1
Single seller – a sole producer of a specific good or
service. The firm and the industry are one
No close substitutes – unique product that nobody else
produces.
Price maker – control over price and quantity supplied.
Blocked entry – strong barriers to entry block potential
competition. The barriers can be economic,
technological or legal for example.
Non-price competition – the product produced can be
standardized (utilities) or differentiated (Windows).
Standardized products use mostly PR for product
awareness and differentiated products will use
advertising to promote their product.
10-32
Examples of Monopoly
•
•
•
•
LO1
Pure monopolies are very rare, but there are
other firms that exist that are close.
Public utility companies
• Natural Gas
• Electric
• Water
Near monopolies
• Intel
• Wham-O
Professional Sports Teams
10-33
Barriers to Entry
•
LO1
Barrier to Entry: factors that keeps firms from entering an
industry:
• Economies of Scale – Declining ATC with added firm size
makes it difficult for a new firm to start up. They cannot
realize the economies of scale.
• Legal Barriers: Patents and Licenses. Patents enable
monopolies to have the exclusive right to an invention.
Licensing makes it difficult for new firms to enter because
there is a limited number of licenses. For example, the taxi
cab business in a large city.
• Ownership of Essential Resources – a monopoly can own
or control the resources necessary to produce their
product.
• Pricing – A monopoly can prevent new firms from
entereing by slashing their prices.
10-34
Average total cost
Economies of Scale
$20
15
0
LO1
ATC
10
50
100
Quantity
200
10-35
Monopoly Demand
•
•
LO1
The pure monopolist is the industry
The demand curve is the market demand curve,
also.
• The difference between a pure competitor and
a pure monopolist is on the demand side.
• Instead of a purely elastic demand curve like
pure competition, it is a down-sloping demand
curve.
10-36
Marginal Revenue is Less Than
Price
• Marginal revenue is less than price – The only way
for a monopolist to increase sales is by charging a
lower price. But by doing so, they forgoe the
revenue from the higher price.
• For example: If a monopolist is selling a product at
$100 and then lowered the price to $90 to sell
additional units, they would lose $10/unit in marginal
revenue. If they sold 5 units their revenue would be
$450, but had it been at the original price, they
would have earned $500. The next unit they sell will
actually generate a revenue of $40.($90 less the
$50 forgone on the first five units sold) So, clearly,
marginal revenue is less than price.
Exit Question
• 61.) Where will a monopoly produce?
Homework
• Begin Reading
Chapter#10