ECON 201 Lecture Notes - Lecture 20: Marginal Cost, Generic Drug, Money Burning
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ECON 201 – Lecture 20 – Chapter 16
*All charts and graphs based off or replicated by Joel Han in class unless stated otherwise
Comparison of Markets
Perfect Competition Monopolistic
Competition
Monopoly
Free Entry/Exit Many Many One
Long run – Economic
Profit
Yes Yes No
Products
Differentiated
No, Idendtical Yes Very (no substitutes)
Market Power None (Price-taker) Yes Yes (Price-maker)
Firm Demand Curve Horizontal Downward sloping Downward Sloping
Differentiated Products
oCoke is a differentiated product
Different recipe
Branding
oCoke is not a monopoly
Many soda Companies
Free entry
oOther examples would include: apartments, clothing, fast food
Short Run: Profit Maximization
oJust like a monopoly
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oSuppose:
PR = AR = 100 – Q
MR = 100 – 2Q
MC = 10 + 3Q
oSolve for optimal Quantity and Price
oSuppose ATC = 60 at optimal Q
oShow optimal Quantity, Price, and profit using MR, AR, ML, ATC
oTo find Q*
MR = MC ... 100-2Q=10+3Q… 5Q=90… Q=18
oTo Find AR
Plug Q* into AR = 100-Q
oTo find Profit
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Econ 201 lecture 20 chapter 16. *all charts and graphs based off or replicated by joel han in class unless stated otherwise. Differentiated products: coke is a differentiated product. Branding: coke is not a monopoly. Free entry: other examples would include: apartments, clothing, fast food. Short run: profit maximization: just like a monopoly. Mc = 10 + 3q: solve for optimal quantity and price, suppose atc = 60 at optimal q, show optimal quantity, price, and profit using mr, ar, ml, atc, to find q* Mr = mc 100-2q=10+3q 5q=90 q=18: to find ar. Plug q* into ar = 100-q: to find profit. Profit = (82-60)*18 profit = 396: note: atc will always intersect mc at atc"s minimum. Economic loss: to calculate the economic loss (atc at q* - p*)q* Long run: free entry: if firms making economic profit. New firms have incentive to enter market. Economic profit declines to zero: if firms making economic losses.
