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2012.10.25 - Monopoly.docx

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McGill University
Agricultural Economics
AGEC 200
Anwar Naseem

Competitive Markets Clicker: Want to maximize profits by choosing quantity where MR = MC If extra revenue you make is greater than marginal cost, then should produce more If MR is less than MC then cut down on production Short run, should shut down price to minimize losses if price is below average variable cost - Because fixed cost is there already. But if P lower than AVC, then increasing losses. - Can’t do anything about fixed cost Firm’s short-run supply is exactly the same as firm’s MC curve above AVC Long run profits in perfectly competitive industry will be eliminated as firms enter Fig 9-8: (iii) the bottom box (white) is total cost b/c ATC = TC /Q therefore TC = ATC x Q Supply curve shifts to the right when because more firms coming in (when making profit) - So price comes down, and so profits shrinking, until so many firms coming in you get zero profits - If there are losses, firms will leave = supply curve shifts left. Price goes up and profits are normal - THIS IS LONG RUN EQUILIBRIUM - Zero profit condition: in long run, econ profits are zero Conclusion - Profit-maximiation: MC = MR - Perfect competition: P = MR - So in competitive equilibrium, P = MC - Recall, MC is cost of producing marginal unit, P is value to buyers of marginal unit - So competitive equilibrium is efficient, maximizes total surplus - In next chapter: monopoly: pricing and production decisions, deadweight loss, regulation Monopoly: complete opposite of competitive Why Monopolies arise - One main cause is barriers to entry  other firms cannot enter market - Three sources of barriers o Single firm owns resources (DeBeers owns most of the world’s diamond mines) o Government gives single firm exclusive right to produce good (patents, copyright laws) o Natural Monopoly: single firm can produce entire market Q at lower ATC than other firms  Eg: 1000 homes need electricity. Fixed cost. ATC declining the more people come in.  Because high fixed cost  ATC lower if one firm services all 1000 homes than if two firms each service 500 homes. Since fixed cost is so high Monopoly vs Competition: Demand Curves - In competitive market o Market demand curve slopes downward. o But demand curve of any individual firm’s is
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