Overview
This lecture compares marginal revenue and marginal cost in perfectly competitive versus imperfectly competitive markets, emphasizing profit maximization and market efficiency.
Perfectly Competitive Markets
- Marginal cost (MC) typically decreases initially due to specialization, then increases due to coordination costs.
- Firms are price takers, accepting the market price (Pā) for their goods.
- The marginal revenue (MR) curve is a horizontal line at the market price.
- Profit maximization occurs where marginal cost equals marginal revenue (MC = MR).
- Firms produce at the quantity where the market price equals marginal cost (P = MC).
Imperfectly Competitive Markets
- Products are differentiated, and price depends on the quantity produced.
- Each firm faces its own downward-sloping demand curve.
- The marginal revenue curve is more steeply downward-sloping than the demand curve.
- Firms still maximize profit where marginal cost equals marginal revenue (MC = MR).
- At profit-maximizing quantity, price (from the demand curve) is higher than both marginal cost and marginal revenue.
Market Efficiency and Inefficiency
- In perfectly competitive markets, market price equals marginal cost at the optimal output (efficient allocation).
- In imperfect competition, price exceeds marginal cost at the optimal output, creating inefficiency.
- The inefficiency is the gap between what buyers are willing to pay (price) and the marginal cost, because firms have no incentive to increase output beyond MC = MR.
Key Terms & Definitions
- Marginal Cost (MC) ā the increase in total cost from producing one additional unit.
- Marginal Revenue (MR) ā the additional revenue from selling one more unit.
- Demand Curve ā shows the price at which each quantity can be sold.
- Price Taker ā a firm that must accept the market price; cannot influence price.
- Imperfectly Competitive Market ā a market where firms have some control over price due to product differentiation.
- Inefficiency ā occurs when the market price is greater than marginal cost at the profit-maximizing output.
Action Items / Next Steps
- Review examples of profit maximization in both market types.
- Study the relationship between marginal cost, marginal revenue, and price in graphs.