Professional Documents
Culture Documents
Learning Outcomes
At the end of this chapter, you should:
Business Economics
3
Business Economics
Average revenue
Total revenue divided by the quantity sold
4
Business Economics
Perfect Competition
Allocation of resources is efficient as price is equal to
marginal cost
No advertising cost
Can earn supernormal profit in the SR if its able to
control the number of players in the market
Business Economics
6
Business Economics
Government regulation
Government gives a single firm the exclusive
right to produce some good or service
Government-created monopolies
Patent and copyright laws
Higher prices; Higher profits
7
Business Economics
Natural monopoly
Arises because a single firm can supply a
good or service to an entire market
At a smaller cost than could two or more firms
Competitive firm
Price taker
One producer of many
Demand horizontal line (Price)
9
Business Economics
Price
Demand
Demand
Quantity of output
Quantity of output
Because competitive firms are price takers, they in effect face horizontal demand curves, as in
panel (a). Because a monopoly firm is the sole producer in its market, it faces the downwardsloping market demand curve, as in panel (b). As a result, the monopoly has to accept a lower
price if it wants to sell more output.
Business Economics
10
10
Monopoly
Monopolies are considered market failures.
X-efficiency - a term used to describe the minimization
of cost which occurs under conditions of competition.
(Cost curve increases)
Cost
MC
AC
C2
Output
C1
O2
Business Economics
O1
11
Monopoly
Increased in costs caused by x-efficiency
Cost
AC1
AC
Output
Business Economics
12
Price Discrimination
Price discrimination
Business practice
Sell the same good at different prices to
different customers
Increase profit
13
Business Economics
13
Price Discrimination
Lessons from price discrimination
1. Rational strategy
Increase profit
Charges each customer a price closer to his or her
willingness to pay
Sell more than is possible with a single price
14
Business Economics
14
Price Discrimination
Lessons from price discrimination
2. Requires the ability to separate customers
according to their willingness to pay
Certain market forces can prevent firms from price
discriminating
Arbitrage buy a good in one market, sell it in other market at
a higher price
15
Business Economics
15
Price Discrimination
The analytics of price discrimination
Perfect price discrimination
Charge each customer a different price
Exactly his or her willingness to pay
16
Business Economics
16
Price Discrimination
Examples of price discrimination
Movie tickets
Airline prices
Discount coupons
Financial aid
Quantity discounts
17
Business Economics
17
Oligopoly
Few sellers
Offer similar or identical products
18
Business Economics
18
19
Business Economics
19
1
The four types of market structure
Economists who study industrial organization divide markets into four types:
monopoly, oligopoly, monopolistic competition,
and perfect competition.
Business Economics
20
20
Business-stealing externality
Negative externality on producers
21
Business Economics
21
Advertising
When firms
Sell differentiated products
At price above marginal cost
22
Business Economics
22
Advertising
Debate over advertising
The critique of advertising
Firms advertise to manipulate peoples tastes
Psychological rather than informational
Creates a desire that otherwise might not exist
23
Business Economics
23
Business Economics
24
Advertising
Debate over advertising
The defense of advertising
Provide information to customers
Customers - make better choices
Enhances the ability of markets to allocate resources
efficiently
Fosters competition
Customers - take advantage of price differences
25
Business Economics
25
Oligopoly
Oligopoly
Only a few sellers
Offer similar or identical products
Interdependent
Perfect oligopoly homogeneous good
Imperfect oligopoly differentiated good
26
Business Economics
26
27
Business Economics
27
Pareto Efficiency
Pareto Efficiency requires that it must not be
possible to change the existing allocation of
resources in such a way that someone is made
better off and no one is made worse off.
Condition when there is Perfect competition, no
externalities and no market failure connected
with uncertainty, then the resulting allocation of
resources will be Pareto Efficient.
Business Economics
28
Pareto Efficiency
Pareto efficiency can be illustrated using a production possibility
boundary curve or frontier (PPB)
Capital goods
B
C
A
Consumer Goods
Business Economics
29
Pareto Efficiency
Business Economics
30