Chapter%208:%20Economics%20of%20Big%20Business

1
Chapter 8 Economics of Big Business
2
Market Structure

• Perfect Competition
• Monopolistic Competition
• Oligapoly
• Monopoly

3
Degree of Market Power

• Concentration Ratio
• percentage of the market sale by the largest four
  (or eight) firms
• CR gt 0.70 indicates significant market power

4
Perfect Competition

• Many buyers and many sellers
• Homogeneous product
• No barriers to enter the market
• Firms are price takers
• Market price is set by D S
• Firms produce all they can at the market price

5
Profit Maximization

• Business firms try to make the highest possible
  profit
• Profit Total Revenue Total Cost
• Profit is maximized when MC MR
• MC additional cost of producing an extra unit
• MR additional revenue from selling an extra unit

6
Price-Taker Firms PMRMC
Price
Firm
Price
Market
S
D
S MC
D MR
P
P
MCMR
S
D
q
Q
Quantity
Quantity
7
Monopoly

• Many buyers, but only one seller
• Product maybe unique or differentiated
• Barriers to enter the market
• Firms are price-makers, facing the market demand

8
Reasons for Monopoly

• Control the supply of raw materials
• Investment / RD requirements
• Government licensing
• Natural Monopoly

9
Price-Maker Firms PgtMCMR
Price
D
MC
P
MCMR
MC
D
MR
Quantity
Q
10
Perfect Competition vs. Monopoly

• Monopoly price is higher than the competitive
  price
• Monopoly output is lower than the competitive
  output
• Since monopoly causes resource misallocation it
  is outlawed by the Anti Trust Law

11
Price-Output Comparison
Pc competitive price Qc competitive output Pm
monopoly price Qm monopoly output PmgtPc but
QmltQc
Price
D
Dead Weight LossABC
MC
A
PMC
Pm
C
MCMR
Pc
B
D
MR
Quantity
Qm
Qc
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Natural Monopoly

• A firm that experiences economies of scale so
  that it operates with a declining average cost
• It is less costly to have one large firm than
  several small firms
• Government permits natural monopoly, but
  regulates its price to minimize the DW-loss

13
Long-run Average Cost
Cost
Diseconomies of scale
Economies of scale
4
1
25
100
Quantity