Cost Curves To Master
Pure Competiton
Monopoly
Oligopoly
Monopolistic Competition
$24
20
16
12
8
4
0 10 20 30 40 50Rate of Output (pairs per day)
Cos
ts (
dolla
rs p
er p
air)
I
J
KL M N
O
ATC
AVC
AFC
Average Costs
Marginal Cost
$35
30
25
20
15
10
5
10 20 30 40 50
pq
r
s t
u
v
Added output is increasingly expensive
Rate of Output (pairs per day)
Basic Cost Curves$32
28
24
20
16
12
8
4
0 1 2 3 4 5 6 7 8
Cos
t (do
llars
per
uni
t)
Rate of Output (units per time period)9
ATC
n
mAVC
AFC
MC
Initial Equilibrium in the Computer Market
1200
1000
800
600
400
200
0 200 400 600 800 1000
Market price
Profits
mD Average
total cost
P = MR
Quantity
C
PR
ICE
OR
CO
ST
The typical firm
$1200
1000
800
600
400
200
0 20 40 60 80
Market demand
Market equilibrium
Market supply
Quantity (thousands)
Pri
ce (
per
com
put
er)
The computer industry
500 6000
800
$1000
Price
or C
ost (
per c
ompu
ter)
Quantity (computers per month)
0 20,000
$1000
800
Quantity (computers per month)
Price
(per
com
pute
r)
The Competitive Price and Profit Squeeze
Profits
S1S2
Market demand
An expanded market supply . . .
MCOld price
G
Hm
ATC
Lowers price and profits for the typical firm
Newprice
Short- vs. Long-Run Equilibrium
MCATC
pS
qS
Pric
e or
Cos
t
Quantity
Short-run equilibrium (p = MC)
pS
Pric
e or
Cos
t
pL
qLQuantity
MCATC
Long-run equilibrium (p = MC = ATC)
Profit Maximization
0 1 2 3 4 5 6 7 8 9
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10111213
$14
Pric
e or
Cos
t (pe
r b
aske
t)
Quantity (baskets per hour)
d
Demand
Marginal revenue
Marginal cost
Average total cost
D
Profits
Monopoly Profits: The Typical Universal Plant
M
$1200
1000
800
600
400
200
0
Pri
ce (
per
com
put
er)
Quantity (computers per month)200 400 600 800 1000 1200 1400
W
K B
Average total cost
Marginal cost
Demand curve facing single plant
Marginal revenue of single plant
C
Profit
1000P
RIC
E (
per
com
pute
r)
QUANTITY DEMANDED (computers per month)0
The Kinked Demand Curve Confronting an Oligopolist
Demand curve facing oligopolist if rivals match price changes
Demand curvefacing oligopolist ifrivals don't matchprice changes
Demand curve facing oligopolist if rivals match price cuts but not price hikes
MA
CD
B$1100
900
8000
Pri
ce o
r C
ost (
doll
ars
per
unit
)
Quantity (units per period)0
Maximizing Oligopoly Profits
Industrymarginal
cost
Industry
average cost
Marketdemand
Industry marginalrevenue
Profits
J
Profit-maximizing
price
Average costat profit-
maximizingoutput
Profit-maximizing output
Output / Time
Price
Output / Time
Price
Price Taker’s Demand Curve
MarketSupply
MarketDemand
P
• The market forces of supply and demand determine price.
PDemand forSingle Firm
• Price takers have no control over the price that they may charge in the market. If such a firm was to offer their good/service at a price above that established by the market they would buy elsewhere.
Individual firms musttake the market price.
Price is determinedin the market.
• In the short run, the price taker will expand output until marginal revenue (price) is just equal to marginal cost.
• When P > MC then the firm can make more on the next unit sold than it costs to increase output for that unit. In order for the firm to maximize its profits it increases output until MC = P.
Profit Maximization when the Firm is a Price Taker
• This will maximize the firm’s profits (rectangle BACP).
d (P = MR)
Price
Output/ Time0 q
ATC
MC
• When P < MC then the firm made less on the last unit sold than it cost for that unit. In order for the firm to maximize its profits it decreases output until MC = P.
Profit
p = MC
AC
PB
P > MC
Increase qP < MC
decrease q
Where is pure profit? Normal Profit?
• Given Pe, firm produces qe where MC = MR
If AC = AC1, break-even
• If AC = AC2, losses
• If AC = AC3, economic profit
Economies of Scale
QM0C
OS
T (
doll
ars
per
unit
)Constant returns to scale
c
ATC1
m1
RATE OF OUTPUT (units
per period)
ATCS
QM0
Economies of scale
c
ATC2
m2
ATCS
RATE OF OUTPUT (units
per period)
QM0
Diseconomies of scale
c
ATC3
m3ATCS
RATE OF OUTPUT (units
per period)
Profit Maximization and Loss Minimization
for the Perfectly Competitive Firm:
Three Cases I
In Case 1, TR TC and the firm earns profits.
It continues to produce in the short run.
In Case 2, TR < TC and the firm takes a loss.
It shuts down in the short run because it minimizes its losses by doing so; it is better to lose $400 in fixed costs than to take a loss of $450.
Profit Maximization and Loss Minimization for the Perfectly Competitive Firm: Three Cases II
In Case 3, TR < TC and the firm takes a loss.
It continues to produce in the short run because it minimizes its losses by doing so; it is better to lose $80 by producing than to lose $400 in fixed costs by not producing.
Profit Maximization and Loss Minimization for the Perfectly Competitive Firm: Three Cases III
Q
D
MC
ATC
P
Q1
Economic profits withprice discrimination
Q2
MR=D