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Topic 2: firms and profit maximization

A ntitrust Economics 2013. David S. Evans University of Chicago, Global Economics Group. Elisa Mariscal CIDE, ITAM, CPI. Topic 2: firms and profit maximization. Topic 2 | Part 2 28 February 2013. Date. Overview. Profit maximization. How to run a profitable business.

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Topic 2: firms and profit maximization

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  1. Antitrust Economics 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, ITAM, CPI Topic 2: firms and profit maximization Topic 2 | Part 2 28 February 2013 Date

  2. Overview

  3. Profit maximization

  4. How to run a profitable business

  5. How to run a profitable business MC $ MR q* Q

  6. How to run a profitable business

  7. How to run a profitable business Demand Marginal Revenue

  8. Maximizing profits – Selecting Optimal Output Level Marginal Cost MC=MR gives optimal output level Demand Marginal Revenue

  9. Maximizing profits – Selecting Optimal Output Level Marginal Cost Charge what the market will bear at optimal output Demand Marginal Revenue

  10. When should you give up? Marginal Cost Costs MC ATC AVC P2 P3 Q

  11. Predatory Pricing is an application Marginal Cost Costs MC ATC AVC P2 P3 Q

  12. How much money do you make? Total Profit(thousands) Point with highest profit Price

  13. What determines Mark-Up? • Where: • P is the Price • MC is Marginal Cost • is the price elasticity of demand facing the firm

  14. Monopoly and market power Market power is the ability to influence price, this ability is extreme for a perfect monopoly

  15. Perfect Monopoly

  16. Perfect Monopoly

  17. Perfect Monopoly MC P PM Surplus lost by consumers PC MR D QM QC Q

  18. Monopoly power

  19. Sources of Monopoly Power

  20. Sources of Monopoly Power

  21. Scale Economies and Natural Monopoly P D PM ATC PR MC MR Q QR QM

  22. Direct Network Effects

  23. Indirect Network Effects

  24. Intellectual Property

  25. Durability of Monopoly Power

  26. Fragility of monopoly disciplines exercise of monopoly power

  27. End of Part 2, Next week Topic 3

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