ECON2209 Lecture Notes - Lecture 8: Demand Curve, Fixed Cost, Natural Monopoly
February 8th
(Still in 1. Perfect Competition)
● Scenario 3: P is between AVC and ATC
● Output and price determination in long run
○ Firms earn zero economic profit
● Conditions for long run competitive equilibrium
○ Firms break even P=LRAC
○ Firms maximize economies of scale
■ MES → Minimum LRAC = LRMC = P
■ MES = “Most efficient scale”
● Evaluation
○ Equity
○ Process equity → is process fair? Is there equal access to opportunities?
■ Test→ perfect and complete information?
■ No barriers?
○ End result equity → is the outcome fair?
○ Zero economic profit in the long run
○ No effective market power
● Efficiency
○ Allocated (economic) efficiency
■ Producing output most preferred, the one that maximizes Total Surplus
(the sum of consumer surplus and PS)
○ Test: Price = Marginal Cost in the short run which is DWL = 0
● Satisfy under perfect competition?
○ Productive (technical) efficiency
■ Producing output with the least amount of resources
■ Test: Minimum of the long run average cost curve LRAC or also known as
being at MES
● Public Policy
○ No public policy required
○ Unless market fails
● 2. Pure Monopoly
○ Definition:
■ One firm, produces the product for which there are no available/local
substitutes.
■ Perfect information
■ High barriers to entry
● Helps cause the effective market power
● 3 main types of barriers:
○ 1. Legal: ex: patents, copyrights
○ 2. Natural:
■ Sole owner of key factor of production
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Document Summary
Scenario 3: p is between avc and atc. Output and price determination in long run. Mes minimum lrac = lrmc = p. Zero economic profit in the long run. Producing output most preferred, the one that maximizes total surplus (the sum of consumer surplus and ps) Test: price = marginal cost in the short run which is dwl = 0. Producing output with the least amount of resources. Test: minimum of the long run average cost curve lrac or also known as. One firm, produces the product for which there are no available/local substitutes. Sole owner of key factor of production. Natural monopoly, a firm that can supply output to the entire market at lowest possible cost, enjoy economies of scale in production and usually have high fixed costs and low marginal cost. Behavioral: behaving in a way to prevent other firms from entry for example predatory pricing. Effective market power can earn positive profits in the long run.