Lecture Issues in economics today - Chapter 6

When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.
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Lecture Issues in economics today - Chapter 6 Chapter 6 Perfect Competition, Monopoly, and Economic vs. Normal Profit McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Chapter Outline • From Perfect Competition to Monopoly • Supply Under Perfect Competition McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. From Perfect Competition to Monopoly • Perfect Competition • Monopolistic Competition • Oligopoly • Monopoly McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Picking the Quantity to Maximize Profit P P MC ATC MC AVC ATC P* MR P* AVC D MR Q* Q* Q Q Many Competitors No Competitors McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Characteristics of Perfect Competition • a large number of competitors, such that no one firm can influence the price • the good a firm sells is indistinguishable from the ones its competitors sell • firms have good sales and cost forecasts • there is no legal or economic barrier to its entry into or exit from the market McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Monopoly • The sole seller of a good or service. • Some monopolies are generated because of legal rights (patents and copyrights). • Some monopolies are utilities (gas, water, electricity etc.) that result from high fixed costs. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Monopolistic Competition • Monopolistic Competition: a situation in a market where there are many firms producing similar but not identical goods. • Example : the fast-food industry. McDonald’s has a monopoly on the “Happy Meal” but has much competition in the market to feed kids burgers and fries. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Oligopoly • Oligopoly: a situation in a market where there are very few discernible competitors • Examples – Satellite TV service (Direct TV, Primestar, Dish Network) – Airlines (American, Delta etc.) McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Which Model Fits Reality? • Perfect competition is rare outside agriculture though it fits some labor markets. • Monopolies are common in utilities • Major branded companies are typically either in oligopolistic or monopolistically competitive industries. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Examples of Different Market Forms Perfect Monopolistic Oligopoly Monopoly Competition Competition 1) Agriculture 1) Fast Food 1) Cars and 1) Windows 2) Lumber 2) Airlines Trucks Operating 2) Soft Drinks system 2) Local Residential Utilities McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Distinguishing Characteristics Between Market Forms Perfect Monopolistic Oligopoly Monopoly Competition Competition Number of Many-often Several Few One thousands or Firms even millions Barriers to None ...