CLASS NOTES FOR
ECONOMICS 251
DR. WILLIAM
SHINGLETON
FALL 2005
THESE NOTES ARE
FOR CHAPTER 24/MONOPOLY
OUR SECOND EXAM
IS THURSDAY, OCTOBER 20.
THE READING MATERIAL IS FROM CHAPTERS
21-22-23
THE NOTES START FROM SEPTEMBER 20
REVIEW EXAM
MATERIAL
REVIEW COST
INCREASE
PRICE PATH
NEW MATERIAL
THE PRICE SETTING
FIRM
TYPES OF FIRMS
PRICE
TAKER VS PRICE SETTER
LAST PART WAS PRICE TAKERS
COMPETITIVE
REGULATED
FRANCHISED
CAUSE
LARGE
NUMBER OF PRODUCERS
HOMOGENEOUS
PRODUCTS
OR
REGULATED PRICE
COMPARE
MINIMUM EFFICIENT SCALE VS DEMAND
NATURAL
MONOPOLY
GOAL:
ECONOMIC PROFIT
PRICE
SETTING FIRMS (EVERYONE ELSE)
DOWNWARD
SLOPING DEMAND CURVES
COMPARE
MINIMUM EFFICIENT SCALE VS DEMAND
GOAL:
ECONOMIC PROFIT
TIME
FRAME
SHORT
RUN OPTIONS
LONG
RUN OPTIONS
COMPETITIVE EQUILIBRIUM
PRICE PATH
SOCIAL
WELFARE/PARETO EFFICIENCY/VALUE
OF COMPETITION
PARETO OPTIMAL
P = MIN ATC => BEST FOR CONSUMERS
$2.00
COST change =>
$2.00
price =>
$2.00
change to consumers
MINIMUM
POSSIBLE PRICE
MC
= MARGINAL UTILITY
PARETO
OPTIMALITY
CAN
BE DISTORTED TO DEFEND THE STATUS QUO
RESERVATIONS
INCOME
DISTRIBUTION
EXTERNALITIES
EXTERNAL
BENEFITS
EXTERNAL
COSTS
DETAILS DETAILS
THE PRICE SETTING FIRM
PRICE
SETTING FIRM DEFINITION
NO
PRICE DISCRIMINATION
MARGINAL
REVENUE
USE STRAIGHT LINE DEMAND CURVES
CONSTRUCTION OF MR CURVE
WHAT DOES NEGATIVE MR MEAN?
MR = PNEW MINUS ( QOLD * PRICE REDUCTION)
ELASTICITY REVIEW
EXAMPLE: SELLING BASEBALL CARDS
PRICE AND MARGINAL REVENUE
NOTE: dMR = 2*dP
QUANT PRICE SALES MARGINAL
REVENUE
0 80 0 0
1 76 76 76
2 72 144 68
3 68 204 60
4 64 256 52
5 60 300 44
6 56 336 36
7 52 364 28
8 48 384 20
9 44 396 12
10 40 400
4
11 36 396 (4)
12 32 384 (12)
13 28 364 (20)
14 24 336 (28)
15 20 300 (36)
16 16 256 (55)
17 12 204 (52)
18 8 144 (60)
19 4 76 (68)
20 0
0 (76)
OPERATING
RULES FOR PRICE SETTING FIRMS
CASE 1... P <
AVC FOR EACH QUANTITY
SHORT RUN
BEST Q = 0
NO SHUT DOWN PRICE
LOSS = FIXED COST
LONG RUN
LIQUIDATION
CASE 2... P > AVC FOR SOME QUANTITY
BUT P < ATC FOR EACH QUANTITY
SHORT RUN
CHOOSE Q SUCH THAT MR = MC
LOSS < FIXED COST
SHOW LOSS AREA
LONG RUN
LIQUIDATION
CASE 3... P = ATC FOR ONE Q, P < ATC FOR
ALL OTHERS
SHORT RUN AND LONG RUN
CHOOSE Q SUCH THAT MR = MC
PROFIT MARGIN = P - ATC
NO PROFIT AREA/NORMAL PROFIT
OPERATING RULES FOR PRICE SETTING FIRMS
CASE 4... P
> ATC FOR
SOME QUANTITY
SHORT RUN AND LONG RUN
CHOOSE Q SUCH THAT MR = MC
PROFIT MARGIN = P - ATC
MAXIMUM PROFIT MARGIN
IS NOT MAXIMUM PROFIT
SHOW PROFIT AREA
PROFIT = P*Q - ATC*Q
THERE
IS NO SUPPLY CURVE FOR FIRM OR FOR INDUSTRY
INDUSTRIAL STRUCTURE...MONOPOLY
DEFINITION/ WHAT IS A MONOPOLY?
NO ENTRY, NO EXIT
ENTRY BARRIERS
EXAMPLES...CABLE TELEVISION, LOCAL
TELEPHONE
SHOW HOW NORMAL PROFIT CAN HAPPEN
REGULATION
NORMAL PROFIT
INEFFICIENCY
AND MONOPOLY
PRICE
NEVER = MIN ATC
OUTPUT
RESOURCES
MU > MC
NON-PARETO OUTCOME
MARKET FAILURE
LDC PERCEPTION OF CAPITALISM
WRITE
OUT AN EXPLANATION TO ONE OF THE CASES ON THE EFFECTS
CHANGED DEMAND
CHANGED COST
NEXT WEEK
OTHER PRICE SETTING FIRMS CH 25-26