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Lecture 9

HIS109Y1 Lecture Notes - Lecture 9: Perfect Competition, Market Power, Marginal Cost


Department
History
Course Code
HIS109Y1
Professor
Kenneth Bartlett
Lecture
9

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ECO105: NOVEMBER 30TH
Pricing For Profits Marginal Revenue and Marginal Cost
Marginal Revenue:
Marginal revenue equals price for price takers and is less than price for price makers. Smart businesses choose
actions when marginal revenue is greater than marginal cost.
Marginal Revenue:
o Additional revenue from selling one more unit (or from more sales).
o Marginal revenue depends on market structure (how competitive an industry is) and whether
business is price taker or price maker.
Marginal revenue = price for price-taking businesses in perfect competition.
Market revenue < price for price-making businesses in other market structures.
Demand & Marginal Revenue for Price Takers (Fig 9.1):
One-price rule
o Products easily resold have a single price in the market.
When a price-making business lowers a price, must lower price on all units sold, not just
new sales.
Reasons why marginal revenue < price for price makers.
Demand and Marginal Revenue for Price Makers with One-Price Rule (Fig. 9.2):
Demand and Marginal Revenue for Price Makers (Fig. 9.3):
Marginal Cost:
Additional Benefits & Costs:
As output ireases, argial ost ireases for usiesses operatig ear apaity or whe usiess’
additional inputs cost more. Marginal cost is usually constant for businesses not near capacity.
Increasing and Constant Marginal Costs (Fig. 9.4):
Diminishing Returns:
o As output increases, decreasing productivity increases marginal costs.
o Businesses operating near capacity, or shifting to more expensive inputs, have increasing
marginal costs to increase output.
o Businesses not operating near capacity have constant marginal cost to increase output.
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