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Perfect Competition:Total, Marginal, and Average Revenue

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Microeconomics ­ECO402
VU
Lesson 30
Perfect Competition
Review of Perfect Competition
­ P = LMC = LRAC
­ Normal profits or zero economic profits in the long run
­ Large number of buyers and sellers
­ Homogenous product
­ Perfect information
­ Firm is a price taker
P
Market
P
Individual Firm
D
S
LMC
LRAC
P0
P0
D = MR = P
q0
Q0
Q
Q
Monopoly
Monopoly
1) One seller - many buyers
2) One product (no good substitutes)
3) Barriers to entry
The monopolist is the supply-side of the market and has complete control over the amount
offered for sale.
Profits will be maximized at the level of output where marginal revenue equals marginal
cost.
Finding Marginal Revenue
­ As the sole producer, the monopolist works with the market demand to determine output
and price.
­ Assume a firm with demand:
·P=6-Q
142
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Microeconomics ­ECO402
VU
Total, Marginal, and Average Revenue
Total
Marginal
Average
Price
Quantity
Revenue
Revenue
Revenue
P
Q
R
MR
AR
$6
0
$0
---
---
5
1
5
$5
$5
4
2
8
3
4
3
3
9
1
3
2
4
8
-1
2
1
5
5
-3
1
$ per 7
unit of
output 6
5
Average Revenue (Demand)
4
3
2
Marginal
1
Revenue
7 Output
0
1
2
3
4
5
6
Observations
1) To increase sales the price must fall
2) MR < P
3) Compared to perfect competition
·  No change in price to change sales
·  MR = P
Monopolist's Output Decision
1) Profits maximized at the output level where MR = MC
2) Cost functions are the same
š (Q ) = R (Q ) - C (Q )
Δ š / Δ Q = Δ R / Δ Q - Δ C / Δ Q = 0 = MC - MR
or MC = MR
143
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Microeconomics ­ECO402
VU
Maximizing Profit When Marginal Revenue Equals Marginal Cost
The Monopolist's Output Decision
­ At output levels below MR = MC the decrease in revenue is greater than the decrease in
cost (MR > MC).
­ At output levels above MR = MC the increase in cost is greater than the decrease in
revenue (MR < MC)
$ per
unit of
MC
output
P1
P*
A
P2
Lost
profit
D = AR
Lost
M
profit
Q
Q
Q
Quantity
Monopoly
The Monopolist's Output Decision
­ An Example
·  By setting marginal revenue equal to marginal cost, it can be verified that profit is
maximized at P = $30 and Q = 10.
·  This can be seen graphically:
Example of Profit Maximization
$
C
t
R
400
300
c
200
t
Profits
150
100
50
c
Quantity
0
5
10
15
20
144
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Microeconomics ­ECO402
VU
Observations
­
Slope of rr' = slope cc' and they are parallel at 10 units
­
Profits are maximized at 10 units
­
P = $30, Q = 10,
TR = P x Q= $300
­
AC = $15, Q = 10,
TC = AC x Q = 150
­
Profit = TR - TC
·  $150 = $300 - $150
$/Q
40
MC
30
AC
Profit
20
AR
15
10
MR
0
5
10
15
20
Quantity
Observations
­
AC = $15, Q = 10,
TC = AC x Q =150
­
Profit = TR = TC = $300 - $150= $150 or
­
Profit = (P-AC) x Q = ($30 -$15)(10) = $150
145
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor