Short-Run and Long-Run Equilibrium-Competition

Short-Run Competitive Equilibrium

The market demand curve shows the quantity that consumers will purchase at different prices. Short-run market equilibrium occurs at the intersection of the market demand and supply curves.the initial short-run equilibrium price is P₁ and the short-run equilibrium industry output is Q_1. , the typical firm will produce an output q₁ in short-run equilibrium. Read the rest of this entry »

Monopoly

In this section, we describe the monopolist’s output decisions. This discussion allows us to develop a measure of the degree of market power and to discuss alternative conception of the welfare loss imposed on society by monopoly. Finally, we discuss economist’ attempts to measure the economic effects of market power. Read the rest of this entry »

The Firm’s Supply Decision-Monopoly

To earn as large a profit as possible, a monopolist will choose the output that makes its marginal cost equal to its marginal revenue..

If the monopolist were producing the output q₁, its marginal revenue would exceed its marginal cost. If the monopolist increased the output from q₁, its revenue would increase more than its cost, meaning that its profit would increase. The monopolist will have an incentive to increase output as long as marginal cost, the profit will be a maximum.. Read the rest of this entry »

The Degree of Market Power

The price elasticity of demand tells us how sensitive the quantity demanded is to price. If the price elasticity of demand is 1, a1 per cent increase in price will result in a 1 per cent decrease in the quantity demanded.

When the price elasticity of demand is large, the quantity demanded is very sensitive to price. A small percentage reduction in price causes a large increase in the quantity demanded. If the price elasticity of demand were 5, a reduction in price of only 1/5^th of 1 per cent would be needed to bring about a 1 per cent increase in the quantity demanded. Read the rest of this entry »