CHAPTER 7 Dynamics of markets Imperfect markets MONOPOLIES

CHAPTER 7 Dynamics of markets: Imperfect markets MONOPOLIES

CAPS requirements Examination of the dynamics of imperfect markets with the aid of cost and revenue curves. • The dynamics of imperfect markets with the aid of cost and revenue curves • Monopolies • Oligopolies • Monopolistic competition

Introduction Imperfect market: a market in which at least one firm has market power. Imperfectly competitive markets include… • Monopoly • Oligopoly • Monopolistic competition

Revenue curves • Imperfectly competitive firm faces downward sloping demand curve for its product. • Can set market price by fixing quantity it supplies therefor a price setter/maker.

MR curve cuts X axis halfway btwn. origin and Imperfectly competitive must reduce price if they wish MR curve negatively sloped & below AR/demand curve. TR maximised where MR = zero. to sell more causing TR to increase smaller amounts where AR/demand curve, cutsbyhorizontal axis.

Monopolies Monopoly: one firm in the industry responsible for total supply of output. • Able to change market price by changing quantity it supplies. • Supplies quantity that enables it to maximise profits (MR = MC).

Characteristics Single seller (price maker) Unique product Complete barriers to entry Incomplete information Can make economic profit in the long run.

Mustcurve choose Demand of acombination monopolist of P & Q

Downward-sloping D curve means increased Therefore MR will be less than price. MR curve of a monopolist sales = decreased price.

as for any producer Cost of. Same production of aother monopolist

NORMAL ECONOMIC PROFITS: AC = AR (demand) AR><AR AC curve ECONOMIC LOSSES: AC LR: of only normal or economic profits. Profits a monopolist Total revenue =<> Total cost

Differences between Monopoly and Perfect Competition