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DETAILED OUTLINE: MARKET STRUCTURES (MICROECONOMICS)

CHAPTER 13 – COSTS OF PRODUCTION

• Firm’s objective: Profit maximization.
• Profit formula: π = TR − TC.
• Total Revenue (TR) = P × Q.
• Explicit costs: direct monetary payments (wages, rent, materials).
• Implicit costs: opportunity costs of owner-owned resources.
• Total Cost (TC) = Explicit Costs + Implicit Costs.
• Accounting profit = TR − Explicit costs.
• Economic profit = TR − (Explicit + Implicit costs).
• Production function: relationship between inputs and output.
• Marginal Product of Labor (MPL) = ΔQ / ΔL.
• Law of diminishing marginal product: MPL declines as L increases (fixed inputs).
• Marginal Cost (MC) = ΔTC / ΔQ.
• Fixed Cost (FC): does not vary with output.
• Variable Cost (VC): varies with output.
• Average Fixed Cost (AFC) = FC / Q.
• Average Variable Cost (AVC) = VC / Q.
• Average Total Cost (ATC) = TC / Q = AFC + AVC.
• MC intersects ATC and AVC at their minimum points.

PERFECT COMPETITION

• Characteristics: many buyers and sellers, homogeneous products, price takers, free entry and exit.
• Firm demand curve: P = AR = MR (horizontal).
• Total Revenue (TR) = P × Q.
• Average Revenue (AR) = TR / Q = P.
• Marginal Revenue (MR) = ΔTR / ΔQ = P.
• Profit maximization rule: MR = MC ⇒ P = MC.
• Short run outcomes:
• • Profit if P > ATC.
• • Loss if AVC < P < ATC.
• • Shutdown if P < AVC.
• Shutdown condition: P < AVC.
• Firm’s short-run supply curve: portion of MC above AVC.
• Long-run decisions:
• • Exit if P < ATC.
• • Entry if P > ATC.
• Long-run equilibrium: P = MC = min ATC.
• Zero economic profit in the long run.
• Perfect competition is allocatively efficient: P = MC.

MONOPOLY

• Characteristics: single seller, no close substitutes, barriers to entry.
• Demand curve: market demand, downward sloping.
• Average Revenue (AR) = Demand.
• Marginal Revenue (MR) lies below demand curve.
• Reason: to sell more output, the monopolist must lower price on all units.
• Profit maximization rule: MR = MC.
• Price determination: P is taken from the demand curve at Q*.
• Monopoly has no supply curve.
• Short run: monopoly may earn profit or incur losses.
• Long run: barriers to entry allow monopoly to earn positive economic profit.
• Comparison with perfect competition: higher price, lower quantity.
• Welfare loss: monopoly creates deadweight loss.

MONOPOLISTIC COMPETITION

• Characteristics: many firms, differentiated products, free entry and exit.
• Firm demand curve: downward sloping (product differentiation).
• Average Revenue (AR) = Demand.
• Marginal Revenue (MR) lies below demand curve.
• Short run: profit maximization at MR = MC.
• Short-run outcomes: firms may earn profit or incur losses.
• If profits exist, new firms enter the market.
• Long run: demand shifts left due to entry.
• Long-run equilibrium: P = ATC.
• Zero economic profit in the long run.
• Firms do not produce at minimum ATC.
• Excess capacity exists.
• Market is not allocatively efficient: P > MC.

OLIGOPOLY

• Characteristics: few dominant firms, interdependent decision-making.
• Products may be homogeneous or differentiated.
• No single standard model for oligopoly behavior.
• Kinked demand curve model:
• • Demand curve has a kink at current price.
• • Marginal revenue curve is discontinuous.
• Profit maximization: MR = MC within the discontinuous range.
• Price rigidity: firms are reluctant to change prices.
• Oligopolies often have significant barriers to entry.
• Long run: firms may earn positive economic profit.
• Market efficiency depends on competition versus collusion.