The Theory of Imperfect Competition Marginal Revenue and price Marginal revenue is always less than the price The relationship between marginal revenue and price depends on two things How much output the firm is already selling The slope of the demand curve > It tells us how much the monopolist has to cut his price to sell one more unit of output Copyright C 2003 Pearson Education, Inc Slide 6-11
Copyright © 2003 Pearson Education, Inc. Slide 6-11 • Marginal Revenue and Price – Marginal revenue is always less than the price. – The relationship between marginal revenue and price depends on two things: – How much output the firm is already selling – The slope of the demand curve » It tells us how much the monopolist has to cut his price to sell one more unit of output. The Theory of Imperfect Competition
The Theory of Imperfect Competition Assume that the demand curve the firm faces is a straight lin Ine =A-BXP (6-1) Then the Mr that the firm faces is given by MR=P-O/B Average and Marginal Costs Average Cost(AC) is total cost divided by output Marginal Cost(MO) is the amount it costs the firm to produce one extra unit Copyright C 2003 Pearson Education, Inc Slide 6-12
Copyright © 2003 Pearson Education, Inc. Slide 6-12 – Assume that the demand curve the firm faces is a straight line: Q = A – B x P (6-1) – Then the MR that the firm faces is given by: MR = P – Q/B (6-2) • Average and Marginal Costs – Average Cost (AC) is total cost divided by output. – Marginal Cost (MC) is the amount it costs the firm to produce one extra unit. The Theory of Imperfect Competition
The Theory of Imperfect Competition When average costs decline in output, marginal cost is always less than average cost Suppose the costs of a firm, C, take the form C=F+CXO This is a linear cost function The fixed cost in a linear cost function gives rise to economies of scale, because the larger the firms output, the less is fixed cost per unit The firms average costs is given by AC=C/O-F/0+c (6-4) Copyright C 2003 Pearson Education, Inc Slide 6-13
Copyright © 2003 Pearson Education, Inc. Slide 6-13 – When average costs decline in output, marginal cost is always less than average cost. – Suppose the costs of a firm, C, take the form: C = F + c x Q (6-3) – This is a linear cost function. – The fixed cost in a linear cost function gives rise to economies of scale, because the larger the firm’s output, the less is fixed cost per unit. – The firm’s average costs is given by: AC = C/Q = F/Q + c (6-4) The Theory of Imperfect Competition
The Theory of Imperfect Competition Figure 6-2: Average Versus Marginal Cost Cost per unit 65432 Average cost Marginal cost 0 24681012141618202224 Output Copyright C 2003 Pearson Education, Inc Slide 6-14
Copyright © 2003 Pearson Education, Inc. Slide 6-14 Figure 6-2: Average Versus Marginal Cost The Theory of Imperfect Competition Average cost Marginal cost 1 2 0 3 4 5 6 2 4 6 8 10 12 14 16 18 20 22 24 Cost per unit Output
The Theory of Imperfect Competition Monopolistic Competition Oligopoly Internal economies generate an oligopoly market structure There are several firms, each of which is large enough to affect prices, but none with an uncontested monopoly Strategic interactions among oligopolists have become Important Each firm decides its own actions, taking into account how that decision might influence its rivals actions Copyright C 2003 Pearson Education, Inc Slide 6-15
Copyright © 2003 Pearson Education, Inc. Slide 6-15 ▪ Monopolistic Competition • Oligopoly – Internal economies generate an oligopoly market structure. – There are several firms, each of which is large enough to affect prices, but none with an uncontested monopoly. – Strategic interactions among oligopolists have become important. – Each firm decides its own actions, taking into account how that decision might influence its rival’s actions. The Theory of Imperfect Competition