Acceptable logotypeECO 2030. Principles of Economics-Price Theory

Market Structure

Competitive Markets
  1. Many buyers and sellers
  2. Homogeneous products
  3. Free entry and exit
  4. Profit = 0

Short Run Profit Maximization

  1. Set Q so that MR = P = MC
  2. Shut down if P < AVC
  3. Short run supply curve: S = MC > AVC

Long Run Entry and Exit

  1. Profit = (P - ATC) × Q
  2. Enter if P > ATC
  3. Exit if P < ATC
  4. Long run equilibrium: economic profit = 0

Comparative Statics

  1. Demand increase
  2. Demand decrease
  3. Supply increase
  4. Supply decrease

Characteristics of a Monopoly

  1. Single firm
  2. Unique product
  3. Barriers to entry
  4. Profit > 0

Barriers to Entry

  1. Monopoly-owned primary resources
  2. Licenses (i.e., government created monopolies)
  3. Economies of scale (e.g., natural monopolies)

Welfare Cost

  1. Deadweight loss
  2. Public Policy

Oligopoly

  1. Few firms
  2. Homogeneous or heterogeneous product
  3. Barriers to entry
  4. An example: car sales

Monopolistic Competition

  1. Many firms
  2. Heterogeneous product
  3. Free entry and exit

Issues

  1. Price competition
  2. Non-price competition (e.g., advertising)
  3. Collusion
  4. Public policy