Equilibrium of the firm in the lr.

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

2. 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.

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

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

1. “+”(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)

2. “-”(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.

1. 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.

2. 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.

The behavior of the firm under perfect competition.

5. Last week was said!!!

6. P↓ = bottom level of MR. AC = P  TR = TC(OPKQ)  in this case a firm earns normal profit.

7. P↓  price line is between AC and AVC curves(AVC<P<AC)  a firm suffers ec. losses(TR<TC(OKLQ)), KLMP – ec. losses).

MR = MC – rile of profit maximization(or losses minimisation)

1. !!! If a firm continues production in the SR, it suffers econ. losses = PKLM; if in the SR firm decides to close down, its losses = TFC = SKLN)

2. TC = OKLQ

3. TVC = OSNQ KS = LN =AFC

4. TFC = SKLN

5. Conclusion: losses can be min, if the firm continues production in the SR. IT’s so, as P>AVC  it compensates AVC and some part of the AFC(PS- отрезок).

6. Losses are minimized, due to the profit on operation(POO) – SPMN and POO = (P –AVC)*Q

7. !!!OR POO = PQ – AVC*q = TR – TVC

1. P touches AVC  shut down point(M).

   1. If a firm prod in the SR  it’ll suffer losses(TFC = PKNM), even if it’ll shut down(losses are the same).

   2. !!! There is no output below the P-line  the MC-curve of the firm above AVC-curve illustrates the supply(MF) of the firm in the SR.