[SOLVED] Short and Long Run Economic Profits

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Your initial post should be 75-150 words in length.

A profit-maximizing price searcher will expand output as long as marginal revenue either exceeds or is equal to marginal cost, lowering its price or raising its price until the midpoint of their demand curve and highest total revenues are achieved.

Why are oligopolies able to earn both short-run economic profits and long-run economic profits, while price taking firms like perfect competitors can only earn short-run economic profits?

Review the characteristics of perfect competition and imperfect competition (monopolistic competition, oligopoly, and monopoly). Barriers to entry don’t exist for perfect competition, but barriers to entry exist for imperfect competition. What are the implications of barriers to entry to the firm and competition? Review consumer surplus and producer surplus; what happens to consumer surplus is price is above equilibrium, or in this case above normal profits? Please provide original work. No plagiarizing.

Lecture is below:

In Week #5: Price Takers versus Price Searchers, we discussed that markets are most efficient and equitable when perfectly competitive. It was also noted that how competitive a market is determines how much market pricing power firms in aggregate enjoy, as well as the price elasticity of the individual firm’s demand curve. When we assess markets, we base efficiency and equity upon whether it’s a market comprised of price takers or price searchers. Price takers are firms who have no market pricing power, no product differentiation from other competitors, and the market is perfectly competitive and efficient and equitable. Price searchers, on the other hand, are firms who have at least some market pricing power, at least some product differentiation from other competitors, and the market is imperfectly competitive leading to losses in efficiency and equity.

So, let’s talk about price searchers now. Price searching firms are also imperfectly competitive. Firms who produce goods with at least some product differentiation can to a certain amount affect market price. are three types of imperfect competitors: monopolistically competitive, oligopoly, and monopoly. With monopolistically competitive, like the perfectly competitive firm, there are many producers, only short-run economic profits can be attained, and products produced are very similar but do have some relative differentiation. Oligopolies and monopolies, on the other hand, have high barriers to entry, and although for oligopolies there is product differentiation but similar products from competitors, there are too few competitors due to high barriers to entry to deny the oligopolies long-run economic profits.

For the monopolistically competitive market structure, supply and demand determine market equilibrium and allocation of resources. Individual firms do have their own demand curve, and the market demand curve is made up by adding up all the firms’ demand curves. The demand curve for the individual firm will have some downward slope, and there will be a separate downward-sloping marginal revenue curve. The optimal point where monopolistically competitive firms produce is where marginal costs equal marginal revenues, and then price is set from that point up on the X-axis (horizontal axis) until it meets the demand curve. Any price in the short run above the competitive price (perfectly competitive) where marginal costs equal marginal revenues will result in economic profits; due to a lack of barriers to entry, new firms will enter, shifting the demand curves of individual firms in the market leftward, pulling price down to the ATC (average total cost curve) back to equilibrium, thus eliminating economic profits in the long run and normal profits existing thereafter.

In summary, we have four market structures, with perfectly competitive being the benchmark from which efficiency and equity are found. The other three market structures – monopolistically competitive, oligopoly, and monopoly – are not fully efficient and equitable. Oligopoly and monopoly are the least competitive market structures in which long-run economic profits are present due to a downward-sloping demand curve and high barriers to entry, while monopolistically competitive has a downward sloping demand curve but low barriers to entry (low product differentiation) with no long-run economic profits.

In Week #6: Economic Profits versus Normal Profits, we discussed that markets are most efficient and equitable when perfectly competitive. It was also noted that how competitive a market is determines how much market pricing power firms in aggregate enjoy, as well as the price elasticity of the individual firm’s demand curve. When we assess markets, we base efficiency and equity upon whether it’s a market comprised of price takers or price searchers. Price takers are firms who have no market pricing power, no product differentiation from other competitors, and the market is perfectly competitive and efficient and equitable. Price searchers, on the other hand, are firms who have at least some market pricing power, at least some product differentiation from other competitors, and the market is imperfectly competitive leading to losses in efficiency and equity.

Secondly, price searching firms are also imperfectly competitive. Firms who produce goods with at least some product differentiation can to a certain amount affect market price. There are three types of imperfect competitors: monopolistically competitive, oligopoly, and monopoly. With monopolistically competitive, like the perfectly competitive firm, there are many producers, only short-run economic profits can be attained, and products produced are very similar but do have some relative differentiation. Oligopolies and monopolies, on the other hand, have high barriers to entry, and although for oligopolies there is product differentiation but similar products from competitors, there are too few competitors due to high barriers to entry to deny the oligopolies long-run economic profits.

What are some other characteristics of oligopolies that differentiate them from monopolistically competitive. Economies of scale is very high. Usually with oligopolies, the long-run average total cost curve has a relatively long economies of scale section, with relatively smaller constant returns and diseconomies sections. Collusion and mergers tend to pervade this market structure, especially when it becomes difficult to combat diseconomies of scale.

Monopolies, on the other hand, have no close competitors, the market demand curve is its demand curve, and no close substitutes exist. Pure monopolies are rare and are either prevented or eliminated due to anti-trust laws, like the Sherman Anti-trust Act of 1890, which break them up. The government can regulate and allow a firm to operate as a monopoly, but the regulated monopoly will not have pure monopoly pricing power nor ultimate economic profits. A regulate monopoly is called a natural monopoly, and the firm is allowed only a fair price at which price is set at its ATC.

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