Equilibrium of the firm in the lr.

4. The SR ec. profit encourages firms to expand(to output↑) and to enter an industry  industrial supply↑, market P↓ and ec. profit is eliminated.

5. The SR ec. losses force the firms to contract and to exit the industry in the result  industrial supply↓ and market P↑  ec. losses disappear.

6. In the LR all competitive firms earn only normal profit(P = LRAC_min  LR_supply =KF)

Perfect competition(PC) and public interest(PI).

3. “+”(why PC is good from the point of PI)

   1. P=MC(rule of allocative efficiency)

   2. P=LRAC_min (rule of production efficiency)  PC market min. the AC of production  it encourages producers to innovate(ec. profit in SR  main reason to innovate)

   3. There is no sense in advertising(as the product is homogenous)

   4. Consumer soverenty is typical for PC market(consumers dictate by demand, what to produce)

4. “-”(why PC is good from the point of PI)

   1. There is no guarantee, that goods are prod. and distributed in the fairest proportions(income inequality).

   2. No guarantee of the optimum combination of g/s, because rich and poor can deform the vision of PI  goods, which are demanded by the rich will be produced.

   3. Some g/s are (under)overprod. by the market(external effects).

   4. Some necessary goods are not produced at all by the society.

   5. Product is homogenous and human wants aren’t satisfied in all their variety.

   6. Firms are numorous and small, so they don’t have much possibilities to innovate, research and develop, buy new equipment.

Profit maximization under monopoly.

3. Monopoly:

   1. There is only one firm in the industry

   2. There’re strict barriers to entry(economic, legal, etc…)

   3. A monopol. firm has complete market power, it’s a price-maker.

   4. The product, in most cases, is unique(no close substitutes)

   5. T he dem for the prod. of the monopoly is the dem. of the whole market or industry  D-curve is downward sloping.

4. Dem. And mr of the monopolistic firm.

   1. To sell more  P↓

   2. P>MR for all the levels of output, except the first unit(MR_{first unit} = P)

   3. MR-curve is located below the D-curve.

   4. TR Max, when MR=0; MR>0 TR↑.

   5. E>1 – elastic, <1 – inelastic; =1 – unitary elastic.

   6. !!! A monopoly will produce only in the elastic part of the D-curve, where MR>0.

   7. !!! In fact a monopoly is restricted be the D(Q₂ can’t be sold with the price of P₁)

   8. Conclusion: a monopoly chooses a combination of P/Q, not only P.

Oligopoly.

1. The basic characteristics of an oligopoly:

   1. There are few firms in the market or few are dominating (concentrated industry).

   2. There is a big market power influence on price.

   3. Product can be both homogeneous and differentiated.

   4. There are strict barriers to enter the market, but still it is possible.

   5. The Demand curve for the product is downward sloping, but flatter then in case of pure monopoly.

   6. A great degree of independence(??? Может быть, interdependence) of the firms; performance of one firm will depend on the behavior of the rivals.

Collusion models. It is very difficult to predict the outcome for a firm – lots of theories.