ECO 211 Chapter Notes - Chapter 12: Deadweight Loss, Loratadine, Demand Curve

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This brings million more in total revenues: this quantity arises from two effects, quantity effect: the lower price allows you to sell million units of claritin, increase in revenue because the increase number of sales. This increase in revenue can be calculated by difference between the two quantities multiplied by. 4 (the new price: however, there is also loss in revenue because consumers are now paying one less dollar. If price effects dominates quantity effect, then total revenue decreases: if price increases, if the quantity effect dominates the price effect, then total revenue decreases. Q: find the point where mc = mr, which gives us an output of 500 million units. Moving upward this point to the demand curve, we find the price of. . 50: subtracting the average total cost of . 02 from the price gives us . 48 of profit per unit sold. This prompts a boom all the way to 1 billion pills.

Related Questions

Watch this video on Porter's Five Forces:

Link: https://hbr.org/video/3590615226001/ the-explainer-porters-five-forces

a. Discuss each of Porter's Five Forces within the context of the four types of markets discussed in class: perfect competition, monopoly, monopolistic competition, and oligopoly.

b. In the interview of Michael Porter assigned from last time, he discusses the concept of "disruptive technologies". Within the context of market competition and industry structure, what should managers be aware of in industries that are experiencing a disruptive technology?

Five Forces Summary:

What are 'Porter's 5 Forces'

Porter's Five Forces model, named after Michael E. Porter, identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. These forces are:

1. Competition in the industry;

2. Potential of new entrants into the industry;

3. Power of suppliers;

4. Power of customers;

5. Threat of substitute products.

Frequently used to identify an industry's structure to determine corporate strategy, Porter's model can be applied to any segment of the economy to search for profitability and attractiveness.

Breaking down 'Porter's 5 Forces'

Porter's Five Forces is a model of analysis that helps to explain why different industries are able to sustain different levels of profitability. This model was originally published in Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. The model is widely used, worldwide, to analyze the industry structure of a company as well as its corporate strategy. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market.

Competition in the industry

The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company. Suppliers and buyers seek out a company's competition if they are unable to receive a suitable deal.

Potential of new entrants into an industry

A company's power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company's market and be an effective competitor, the more a company's position may be significantly weakened.

Power of suppliers

This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are, and how much it would cost a company to switch from one supplier to another. The fewer number of suppliers and the more a company depends upon a supplier, the more power a supplier holds.

Power of customers

This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is, and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds.

Threat of substitutes

Competitor substitutions that can be used in place of a company's products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy and of low cost, a company's power can be weakened.

brownscorpion305

Cray Computer, Inc., located in Colorado Springs, Colorado, is a privately-held producer of high-speed electronic computers with immense storage capacity and computing capability. Although the Crays market is restricted to industrial users and a few large government agencies (e.g., Department of Health, NASA, National Weather Service, etc.), the company has profitably exploited its market niche.

Glen Cray, founder and research director, has recently announced his retirement, the timing of which will, unfortunately, coincide with the expiration of several patents covering key aspects of the Cray computer. Your company, a potential entrant into the market for supercomputers, has asked you to evaluate the short- and longer-run potential of this market. Based on data gathered from your company's engineering department, user surveys, trade associations, and other sources, the following market Demand and cost information has been developed:

P = $54 - $1.5Q

TC = $200 + $6Q + $0.5Q²

where P is the price, Q is units measured by the number of supercomputers, TC is total costs, including a normal rate of return and all figures are in millions of dollars.

A. Assume that these demand and cost data are descriptive of Cray's historical experience.

i.Calculate the profit-maximizing output, price, and economic profit earned by Cray Computer as a monopolist.

ii. What is the point price elasticity of demand at this output level?

B. After the patents expire and barriers to entry are eliminated, the market structure changes.

i.If the new entrants have the same total cost structure as Cray, and a competitive equilibrium results.

ii. What will the output of one firm be after all adjustment has taken place; and what will the price be in the market?

iii. What will one firm's profits be?

C. Assume as in B that barriers to entry are eliminated and all entrants have the same cost conditions; however, firms are able to differentiate their products in the eyes of their customers.

i. What will the output of one firm be after all adjustments have taken place?

ii. What will the price be? (Assume that entry causes a parallel shift in the demand curve, as in the monopolistic competitive market).

iii. What will the firm's profits be?

D. Assume that the point price elasticity of demand calculated in part A is a good estimate of the relevant arc price elasticity. What are the estimates for the potential overall market size (i.e., total quantity demanded in the market) for super-computers in B and C?

E.If no other near-term entrants are anticipated, should your company enter the market for supercomputers using the estimates of the market size in D? Why or why not? (Hint: Criterion for entry: if in the longer-run equilibrium the total quantity demanded in the market is greater or equal to the sum of the amounts produced by two firms. There is room for another firm.)

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1. if the government attempts to break up a natural monopoly to enforce competition in an industry

A. the average cost of producing the good will increase

B. the smallest firm will have a significant cost advantage over the larger, less efficient firms

C. the average cost of producing the good will decrease

D. the price paid by consumers will be expected to remain the same.

2. which statement is true?

A. the monopolistic competitor always makes a profit in the short run

B. the monopolistic competitor operates at peak efficiency

C. product differentiation takes place in the minds of the buyers

D. none of these statements is true

3. Price discrimination

A. occurs when a good or service is resold

B. is prohibited by law

C. occurs when a seller charges two or more prices for the same good or service

D. occurs when the seller charges different prices for different quality products

4. Monopolistic competition may lead to each of the following except

A. inefficiency

B. overdifferentiation

C. overcapacity

D. monopoly profits

5. In the long run in monopolistic competition

A. most firms are making a profit

B. the absence of entry barriers ensures that there are no profits

C. economies of scale ensure that there are no profits

D. most firms are losing money

6. Price discrimination means

A. charging different prices for identical goods that have identical production costs

B. paying wages according to race or sex rather than productivity

C. exploiting the working masses by charging the highest single price possible.

D. eliminating all costs so that only pure profits are realized

7. The definition of monopolistic competition includes

A. few firms and ease of entry and exit

B. few firms and barrieres to entry and exit

C. many firms and barriers to entry and exit

D. many firms and ease of entry and exit

8. Which statement is true?

A. there are many firms in a monopolistically competitive industry.

B. monopolistic competitors produce an identical product

C. in order for product differentiation to take place, there must be clear physical differences amont the products sold

D. none is true

9. Long-run equilibrium for firms in monopolistically competitive industries is similar to that for firms in perfect competition in that

A. price equals minimum possible average total cost

B. price equals marginal cost

C. marginal revenue equals average total cost

D. price equals average total cost

10. Which statement is false?

A. Oligopolies are illegal in most states

B. most oligopolies engage in outright collusion

C. Ford motor company is an oligopoly

D. none of these statements is false

ECO 211 Chapter Notes - Chapter 12: Deadweight Loss, Loratadine, Demand Curve

ECO 211 Full Course Notes

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