Author: John Bouman

Profits in Pure Competition Because of the relative ease with which new firms can enter a purely competitive industry, it is unlikely that economic profits will be very high in the long run. In fact, economists say that for firms in perfect competition economic profits are zero in the long run. This means that there are normal or average accounting profits, but no economic profits. If in the short run economic profits are above zero (above normal accounting profits), then existing firms have an incentive to increase production. Also, venture capitalists (investors) from outside the industry will become attracted to the profit potential, and enter the industry. This increases the supply of the product and lowers the price in the market. The lower price will decrease profits until in the long run economic profits are zero again. The reverse is also true. If firms in the industry are incurring losses, then some (the weaker ones) will go out of business. The lower supply will raise the price and increase the profits for the surviving businesses. If there is not enough demand for even one business to survive (producers of typewriters; black-and-white televisions), then the industry will cease to exist, and resources will be allocated to other, more-profitable industries (producers of personal computers; color and large-screen televisions). Long-Run Equilibrium Let’s analyze the long-run equilibrium for the perfectly competitive industry in...

Characteristics of the Farming Industry The farming industry in the United States and other industrialized countries is very competitive. It is an example of an industry that is nearly purely competitive. Characteristics of the farming industry include the following: 1. There are many farmers. 2. There are relatively low barriers to enter the farming industry. 3. Farmers competing in the same market sell identical or nearly identical products. 4. Buyers of agricultural products have significant information about the product. Farm Production and Elasticity We have observed the following about production in the farming industry in most industrialized  countries: 1. Productivity has increased considerably. 2. Demand for farm products is income inelastic. 3. Demand for farm products is price inelastic. Productivity has increased considerably because of tremendous advances in technology, automation, fertilizer techniques, and genetic engineering. Due to these the advances, the supply curves of farm products, such as wheat, grain, oats, peanuts, meat, fruits, and dairy products, have experienced significant shifts to the right (see graph below). The demand for food has increased also, but not as much. This is because income elasticity of demand is relatively low. Buyers’ income elasticity is relatively low because there is a limit to how much most people can and want to eat. Therefore, the demand has increased only a fraction of how much supply has increased. Some people have shifted to more...

What’s in This Chapter? A monopoly is an industry in which one seller dominates or controls the industry. There are two kinds of monopolies: government granted monopolies, and free market monopolies. The delivery of first class letters by the U.S. Postal Service is government granted; no other company is allowed to deliver first class letters. In the Internet search industry, mostly dominated by Google, other companies are allowed to compete. The U.S. Postal Service does not have to fear potential competitors (in the area of delivering first class letters, providing passports, and a few other services). It does not have to operate at maximum efficiency, and does not have to keep its prices as low as it would if there had been more competition. Google does have to fear competitors, because of the threat of potential competitors (it already has some competitors, including Microsoft’s Bing, and Yahoo Search). If Google does not operate efficiently and if it does not keep delivering a quality product, then it will lose market share and lose advertising revenue. Google also has to make sure it doesn’t illegally abuse its monopoly power (even though it does appear it has done this in some ways) if it wants to avoid a public backlash or court case. Google may be considered a near monopoly in the Internet search industry, but, unlike a government granted monopoly, it...

What is a Monopoly?  A pure monopoly industry is an industry with only one seller, A near monopoly is an industry in which one seller dominates the industry. Typically a monopoly firm is a large company that sells a product for which there are no close substitutes. Reasons for Monopoly Forming Monopolies or near monopolies typically develop because of one of more of the following: 1. Legal barriers. The government prohibits competitors from entering the market. For example, gas and electric suppliers, cable television providers, the United States Postal Service, and Amtrak are given exclusive rights to supply their products in the market. 2. Patents and copyrights. The government provides a company the sole rights to supply a product or a component of a product, which is patented or copyrighted. Patents and copyrights protect companies’ innovations that have been expensive to research, develop, and market. For example, many medical devices and medicines are patented. 3. Licenses. Governments require licenses by, for example, lawyers, doctors, accountants, and taxi drivers in order to protect consumers, as well as suppliers. 4. Trade restrictions. Governments impose tariffs, quotas, and other import restrictions to protect domestic producers. 5. Exclusive ownership of resources. Some companies, such as the De Beers diamond company, owned most of the resources to supply the product until recently. This serves as a barrier to entering the industry. The OPEC countries...

Average and Marginal Revenue Average revenue is equal to the price of the product, if there is no price discrimination (price discrimination occurs when a firm charges different prices to different economic groups, such as students and senior citizens). In this case, the average revenue curve is the same as the demand curve. Unlike the purely competitive firm’s marginal revenue curve, the monopolist’s marginal revenue curve is different from its demand curve. Because the firm lowers its price when it wants to sell more products (and vice versa), marginal revenue decreases as output increases. Therefore, the marginal revenue curve lies below the demand curve. At any output, except for the first output value, marginal revenue is less than price and the average revenue. The following example illustrates this. Quantity Price Total Revenue Average Revenue Marginal Revenue 100 $0.50 $50 $0.50 – 120 $0.45 $54 $0.45 $0.20 140 $0.40 $56 $0.40 $0.10 The monopolist sells 100 newspapers at a price of $.50. It sells 120 newspapers at $.45, and 140 newspapers at $.40 per paper. When the price changes to $.45, marginal revenue decreases to $.20 (marginal revenue is the increase in revenue divided by the increase in quantity, or $4/20). When the price changes to $.40, marginal revenue decreases to $.10 ($2/20). Another Example Below is another example of marginal and average revenue calculations for a monopolist. Consider the...