11. Economic
Profit
Implicit costs
(including a
normal profit)
Explicit
Costs
Accounting
costs (explicit
costs only)
Accounting
Profit
Economic(opportunity)Costs
T
O
T
A
L
R
E
V
E
N
U
E
Profits to an
Economist
Profits to an
Accountant
ECONOMIC COSTS
17. ECONOMIES AND
DISECONOMIES OF SCALEUnitCosts
Output
long-run ATC
Economies
of scale
Diseconomies
of scale
Constant returns
to scale
18. SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...
First:
Total-Revenue -Total Cost Approach
Three Characteristics of MR=MC Rule:
• The rule applies only if producing
is preferred to shutting down
• Rule applies to all markets
• Rule can be restated P=MC
Second:
Marginal-Revenue -Marginal Cost
Approach
MR = MC Rule
30. Temporary profits and the reestablishment
of long-run equilibrium
S1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
MR
D1
31. An increase in demand increases profits…
MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Economic
Profits
S1
32. New competitors increase supply, and lower
prices decrease economic profits.
MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Zero Economic
Profits
S1
S2
33. Decreases in demand, losses, and the
reestablishment of long-run equilibrium
S1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D1
MR
34. A decrease in demand creates losses…
MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Economic
Losses
S1
37. PURE COMPETITION AND EFFICIENCY
Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC
39. MONOPOLY REVENUES & COSTS
Q
DollarsDollars
$200
150
200
50
$750
500
250
TR
MR D
InelasticElastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
A Monopolist will
always operate on
the Elastic Portion
of the Demand
Curve
Inelastic
Portion
MR is
Negative
40. Profit Maximization Under Monopoly
D
MC
ATC
MR
$94
$122
Profit
MR = MC
Profit
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenueRemember the MR=MC Rule?
41. Profit Maximization Under Monopoly
D
MC
ATC
MR
$94
$122
Profit
MR = MC
Profit
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenue
42. Loss Minimization Under Monopoly
D
MC
ATC
MR
A
Pm
Loss
MR = MC
Loss
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenue
AVC
Qm
V
Since Pm exceeds AVC,
the firm will produce
43. Loss Minimization Under Monopoly
D
MC
ATC
MR
A
Pm
Loss
MR = MC
Loss
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenue
AVC
Qm
V
What are the
Economic Effects
of Monopoly?
44. Q
INEFFICIENCY OF PURE MONOPOLY
P
D
MR
S = MC
Pc
Pm
QcQm
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
An industry in pure competition
sells where supply and
demand are equal
45. Q
INEFFICIENCY OF PURE MONOPOLY
P
D
MR
S = MC
Pc
Pm
QcQm
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
Monopoly pricing effectively
creates an income transfer
from
buyers to the seller!
54. D
MR
P1
ATC
PriceandCosts
Q1
Expect New Competitors
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
Quantity
A1
New competition drives down the
price level – leading to economic
losses in the short run.
MC
Short-Run
Economic
Profits
59. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
60. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Greatest
Combined
Profit
61. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy
RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Independent
Actions
Stimulate
Response
62. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy
RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Independent
Actions
Stimulate
Response
Gravitating
to the
Worst Case
63. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy
RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Collusion
Invites a
Different
Solution.
64. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy
RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Collusion
Invites a
Different
Solution.
65. OLIGOPOLY BEHAVIOR
A Game-Theory Overview
High
Low
High Low
Uptown’sPriceStrategy
RareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
But, the
incentive
to cheat
is very real.
Collusion
Invites a
Different
Solution.