Managerial Economics CH 4

Rift Valley University
MBA Program
(BADM – 641)
𝑇𝑃𝐿 𝑄𝐿
Preceding Chapter • APL =
𝐿 𝐿
𝜕𝑇𝑃𝑘 𝜕𝑄𝑘
• 𝑴𝑷𝑲 = =
• Theory of the Firm 𝜕𝑘
𝝏𝑸𝑳
𝜕𝑘
 R = PQ. • 𝑴𝑷𝑳 = = 𝜷𝑨𝑲𝜶 𝑳𝜷−𝟏

• Theory of Production 𝝏𝑳
 π = R – C • Theory of Cost • Using Cobb–Douglas production function

𝝏𝑸
 Tπ = TR – TC 𝑴𝑷𝑲 = 𝑲 = 𝜶𝑨𝑲𝜶−𝟏 𝑳𝜷
𝝏𝑲
 Mπ = Δπ/ΔQ = [π1 – π0 ]/[q1 – Q0 ] • TC = PkK0 + PLL

 MR = ΔR/ΔQ = [R1 – R0] / [Q1 – Q0] • TC = PkK0 + PLL
 MC = ΔC/ΔQ = [C1 – C0] / [Q1 – Q0] • TC(Q) = TFC + TVC(Q)
𝑻𝑭𝑪
 QL = f(K0, L) = TPL • 𝑨𝑭𝑪 =
𝑸
 QK = f(K, L0) = TPk • 𝑨𝑽𝑪 =
𝑻𝑽𝑪
𝑸
𝜕𝑇𝑃𝐿 𝜕𝑄𝐿
 𝑴𝑷𝑳 = = • 𝑨𝑻𝑪 =
𝑻𝑪
=
𝑻𝑭𝑪+𝑻𝑽𝑪
= AFC + AVC
𝜕𝐿 𝜕𝐿 𝑸 𝑸
𝑇𝑃𝐿 𝑄𝐿
 APL=
𝐿
=
𝐿 • 𝑴𝑪 =
𝒅𝑻𝑪
𝒅𝑸
=
𝒅𝑻𝑽𝑪
𝒅𝑸
…etc
Contents of the Chapter
Chapter- Four: market structure and optimization

decision
4.1 Competitive Market Structure
4.2 Monopoly
4.3 Monopolistic Competition
4.4 Oligopoly Models
4.1 competitive market structure
Competitive Market Structure
In order to maximize profits or value of the
organizatio, managers must use the information that
they have relating to demand and costs in order to
determine strategy regarding price and output, and
other variables.
The focus of this lecture is the four market structures.
You/students will learn the characteristics of pure
competition, pure monopoly, monopolistic competition,
and oligopoly. Using the cost schedule from the
previous lecture, the idea of profit maximization is
explored.
Competitive Market Structure…
Market Structure – those characteristics of the market that
significantly affect the behavior and interaction of buyers and
sellers
 number and size of sellers and buyers
 type of the product
 conditions of entry and exit
 transparency of information
• Determinants of market structure
Freedom of entry and exit
Nature of the product – homogenous (identical),
differentiated?
Control over supply/output
Control over price
Barriers to entry
 The four market structures

perfect competition
monopoly
monopolistic competition
oligopoly
Features of the four market structures
Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm
Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker
Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively
competition several restaurants
elastic
Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)
Local water Downward sloping:

Pure One Restricted or Unique company, train more inelastic than
Monopoly completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price

faced by firm

Monopolistic Very Builders, Downward sloping,

competition Many restaurants
elastic


Pure One Restricted or Unique company more inelastic than
Monopoly completely oligopoly. Firm has
blocked considerable
control over price

faced by firm


elastic


control over price

faced by firm


elastic


control over price

faced by firm


competition Many convenience
stores elastic


control over price

faced by firm


competition Many convenience
stores elastic


control over price
Perfect Competition
Pure or perfect competition is rare in the real world, but the model is
important, because it helps us to analyze industries with characteristics
similar to pure competition.
Characteristics
1. Large number of buyers and sellers – no individual seller can influence
or impact on market price.
2. Homogenous or standardized products: each seller’s product is
identical to its competitors’.
3. Firms are price takers: individual firms must accept the market price
and can exert no influence on price.
4. Free entry and exit: no significant barriers prevent firms from entering
or leaving the industry.
5. Perfect information available to buyers and sellers
Perfect Competition …
Market Conduct – a firm’s policies toward its market and
toward the moves made or depends by its rivals in that market
 pricing behavior
 product strategy
 research and innovation
 advertising
 legal tactics
Demand
 The individual firm will view its demand as perfectly elastic. A
perfectly elastic demand curve is a horizontal line at the price.
 The demand curve for the industry is not perfectly elastic, it

only appears that way to the individual firms, since they must
take the market price no matter what quantity they produce.
 Therefore, the firm’s demand curve is a horizontal line at the

market price.
 Marginal revenue (MR) is the increase in total

revenue resulting from a one-unit increase in
output.
 Since the price is constant in the perfect

competition. The increase in total revenue from
producing 1 extra unit will equal to the price.
Therefore, P = MR in perfect competition.
Perfect Competition – Graphically
Industry’s market Firm’s market
P Q TR MR
5 0 0 -
5 10 50 5
P D S 5 20 100 5
d MR
Pe
Q Q 20
Qe 0 10
Short Run Analysis of Profit Maximization
 In the short run, the firm has fixed resources and maximizes
profit or minimizes loss by adjusting output.
 Firms should produce if the difference between total revenue

and total cost is profitable or if Economic Profit (EP >0
 The firm should not produce, but should shut down in the short
run if its loss exceeds its fixed costs.
Fixed cost in real life would be rent of the office, business

license fees, equipment lease, etc. These cost would have
to be paid with or without any output.
Therefore, fixed cost would be the loss of shut down at

any time. If by producing one unit of output, this loss could
be lowered, then this unit should be produced to minimize
the loss.
However, if by producing one unit of output, this loss would
be higher , then this unit should not be produced. The firm
should shut down, just pay for the fixed cost.
Perfect Competition – Short run “Conduct”
MC
p
AC
dd = MR
Economic profit = (P-AC) q
q Q
P = MR MC = MR P>AC
Perfect Competition Cont. ..
Long Run Analysis

Obviously, the firm cannot be in loss for long. Three
assumptions are made for the long run analysis:
1. Entry and exit are the only long run adjustments.

2. Firms in the industry have identical cost curves.
3. The industry is in constant return to scale.
Perfect Competition Cont. ..
In long run, if economic profits are earned, firms enter
the industry, which increases the market supply, causing
the product price to go down. Until zero economic profits
are earned, then the supply will be steady/stable.
If losses are incurred in the short run, firms will leave the
industry which decreases the market supply, causing the
product price to rise until losses disappear.
This model is one of zero economic profits in long run.
The long run equilibrium is achieved, the product price
will be exactly equal to, and production will occur at,
each firm’s point of minimum average total cost.
Perfect Competition – long run “conduct”
Industry’s equilibrium If P>AC, new firms start entering
the industry and the equilibrium
price falls.
P S
D
If Р < АС, the firms will start
leaving the industry and the
Pe equilibrium price will increase.
P’ The industry is in a long run

equilibrium when P = AC
Qe Q In the long run the firms make

normal profit
Long-run equilibrium of the firm under perfect competition
P
(SR)MC
(SR)AC
LRAC
DL
AR = MR
LRAC = (SR)AC = (SR)MC = MR = AR
Q
Advantages of Perfect Competition
High degree of competition helps allocate

resources to most efficient use
Price = marginal costs
Normal profit made in the long run
Firms operate at maximum efficiency
Consumers benefit
What happens in a competitive environment?
New idea? – firm makes short term abnormal

profit
Other firms enter the industry to take advantage
of abnormal profit
Supply increases – price falls
Long run – normal profit made
Choice for consumer
Price sufficient for normal profit to be made but
no more!
4.2 Monopoly
In this Section,
look for the answers to these questions
Why do monopolies arise?
Why is MR < P for a monopolist?
How do monopolies choose their P and Q?
How do monopolies affect society’s well-being?
What is price discrimination?
30
Introduction
A monopoly is a firm that is the sole seller of a

product without close substitutes.
In this chapter, we study monopoly and contrast it
with perfect competition.
The key difference:
A monopoly firm has market power, the ability to
influence the market price of the product it sells. A
competitive firm has no market power.
Why Monopolies Arise?
The main cause of monopolies is barriers to entry –
other firms cannot enter the market.
Three sources of barriers to entry:
1. A single firm owns a key resource.
E.g., Ethio-telecom owns most/all of the country’s connection
2. The gov’t gives a single firm the exclusive right to produce

the good.
E.g., patents, copyright laws
Why Monopolies Arise
3. Natural monopoly: a single firm can produce the entire
market Q at lower cost than could several firms.
Example: 1000 homes

Cost Electricity
need electricity
ATC slopes downward
ATC is lower if due to huge FC and
one firm services small MC
$80
all 1000 homes
than if two firms $50 ATC
each service Q
500 homes. 500 1000
Monopoly vs. Competition: Demand Curves
In a competitive market, the

market demand curve slopes
A competitive firm’s
downward. demand curve
P
But the demand curve for any
individual firm’s product is
horizontal at the market price.
D
The firm can increase Q without
lowering P, so MR = P for the
competitive firm.
Q
Monopoly vs. Competition: Demand Curves
A monopolist is the A monopolist’s

only seller, so it faces P
demand curve
the market demand
curve.
To sell a larger Q,
the firm must reduce P.
D
Thus, MR ≠ P. Q
Active Learning 1
A monopoly’s revenue
Kaldi’s is the 0nly seller of
Q P TR AR MR
cappuccinos in town.
0 $4.50 n.a.
The table shows the market
demand for cappuccinos. 1 4.00
2 3.50
Fill in the missing spaces of
the table. 3 3.00
What is the relation 4 2.50

between P and AR? 5 2.00
Between P and MR? 6 1.50
36
ACTIVE LEARNING 1
Answers
Here, P = AR, Q P TR AR MR
same as for a 0 $4.50 $0 n.a.
$4
competitive firm. 1 4.00 4 $4.00
3
Here, MR < P, 2 3.50 7 3.50
2
Whereas, MR = P 3 3.00 9 3.00
1
for a competitive firm. 4 2.50 10 2.50
0
5 2.00 10 2.00
–1
6 1.50 9 1.50
37
Common Grounds’ D and MR Curves
P, MR
$5
Q P MR
4
0 $4.50 Demand curve (P)
$4 3
1 4.00 2
3
2 3.50 1
2 0
3 3.00
1 -1 MR
4 2.50
0 -2
5 2.00 -3
–1 0 1 2 3 4 5 6 7 Q
6 1.50
Understanding the Monopolist’s MR
Increasing Q has two effects on revenue:
Output effect: higher output raises revenue
Price effect: lower price reduces revenue
To sell a larger Q, the monopolist must reduce the
price on all the units it sells.
Hence, MR < P
MR could even be negative if the price effect exceeds
the output effect (e.g., when Common Grounds
increases Q from 5 to 6).
Profit-Maximization
Like a competitive firm, a monopolist maximizes

profit by producing the quantity where MR = MC.
Once the monopolist identifies this quantity,
it sets the highest price consumers are willing to pay
for that quantity.
It finds this price from the D curve.
Profit-Maximization
Costs and
Revenue MC
1. The profit-maximizing
Q is where P
MR = MC.
2. Find P from the
demand curve at this D
Q.
MR
Q Quantity
Profit-maximizing output
The Monopolist’s Profit
Costs and
Revenue MC
As with a
P
competitive firm, ATC
ATC
the monopolist’s
profit equals or EP D
(P – ATC) x Q MR
Q Quantity
A Monopoly Does Not Have an S Curve
A competitive firm
 takes P as given
 has a supply curve that shows how its Q depends on P.
A monopoly firm
 is a “price-maker,” not a “price-taker”
 Q does not depend on P; rather, Q and P are jointly
determined by MC, MR, and the demand curve.
So there is no supply curve for monopoly.

CASE STUDY: Monopoly vs. Generic Drugs
The market for

Patents on new drugs Price a typical drug
give a temporary
monopoly to the seller. PM
When the patent PC = MC

expires, the market D
becomes competitive, MR
generics appear.
QM Quantity
QC
The Welfare Cost of Monopoly
Recall: In a competitive market equilibrium,
P = MC and total surplus is maximized.
In the monopoly eq’m, P > MR = MC
The value to buyers of an additional unit (P)
exceeds the cost of the resources needed to produce
that unit (MC).
The monopoly Q is too low – could increase total surplus
with a larger Q.
Thus, monopoly results in a deadweight loss/burden.
The Welfare Cost of Monopoly
Competitive eq’m: Price Deadweight

quantity = QC loss MC
P = MC P
total surplus is maximized P = MC
MC
Monopoly eq’m:
D
quantity = QM
MR
P > MC
deadweight loss QM QC Quantity
Price Discrimination
Discrimination: treating people differently based on some
characteristic, e.g. race or gender.
Price discrimination: selling the same good at different prices
to different buyers.
The characteristic used in price discrimination is willingness to pay
(WTP):
A firm can increase profit by charging a higher price to
buyers with higher WTP.
Perfect Price Discrimination vs. Single Price Monopoly
Consumer
Price
surplus
Here, the monopolist Deadweight
charges the same price PM loss
(PM) to all buyers.
MC
A deadweight loss Monopoly
profit D
results.
MR
QM Quantity
Perfect Price Discrimination vs. Single Price Monopoly
Here, the monopolist

Price
produces the competitive Monopoly
profit
quantity, but charges each
buyer his or her WTP.
This is called perfect price MC
discrimination. D
The monopolist captures all MR
CS as profit. Q Quantity
But there’s no DWL.
Price Discrimination in the Real World
In the real world, perfect price discrimination is not possible:

No firm knows every buyer’s WTP
Buyers do not announce it to sellers
So, firms divide customers into groups based on some
observable trait that is likely related to WTP, such as age.
Examples of Price Discrimination
Movie tickets
Discounts for seniors, students, and people who can attend during weekday
afternoons. They are all more likely to have lower WTP than people who
pay full price on Friday night.
Airline prices
Discounts for Saturday-night stay-overs help distinguish business travelers,
who usually have higher WTP, from more price-sensitive leisure travelers.
Discount coupons
People who have time to clip and organize coupons are more likely to have
lower income and lower WTP than others.
Need-based financial aid
Low income families have lower WTP for their children’s college education.
Schools price-discriminate by offering need-based aid to low income
families.
Conclusion of Monopoly
 In the real world, pure monopoly is rare.
 Yet, many firms have market power, due to:
selling a unique variety of a product
having a large market share and few significant competitors
 A monopoly firm is the sole seller in its market. Monopolies arise
due to barriers to entry, including: government-granted
monopolies, the control of a key resource, or economies of scale
over the entire range of output.
 A monopoly firm faces a downward-sloping demand curve for its
product. As a result, it must reduce price to sell a larger quantity,
which causes marginal revenue to fall below price.
Conclusion of Monopoly …
Monopoly firms maximize profits by producing the quantity
where marginal revenue equals marginal cost. But since
marginal revenue is less than price, the monopoly price will be
greater than marginal cost, leading to a deadweight loss.
Monopoly firms (and others with market power) try to raise their
profits by charging higher prices to consumers with higher
willingness to pay.
This practice is called price discrimination.
4.4 Oligopoly models
WHAT IS OLIGOPOLY?
Another market type that stands between perfect competition and
monopoly.
An oligopoly is a market, dominated by a small number of firms,
whose actions directly affect one another’s profits.
Oligopoly is a market type in which (characteristics):
A small number of firms compete/ sellers.
Interdependence of decision making: In any decision a firm makes,
it must take into account the expected reaction of other firms
Barriers to entry
Product may be homogeneous or there may be product
differentiation
Indeterminate/ uncertain price and output
Interdependence
A key characteristic of oligopolies is that each firm can
affect the market, making each firm’s choices dependent on
the choices of the other firms. They are interdependent.
The importance of interdependence is that it leads to
strategic behavior.
 Strategic behavior is the behavior that occurs when what is
best for A depends upon what B does, and what is best for
B depends upon what A does.
 Oligopolistic behavior includes both ruthless competition
and cooperation.
Models of Oligopoly Behavior
There is no single model of oligopoly behavior exists.
• An oligopoly model can take two extremes:

• The cartel model is when a combination of firms acts as if it
were a single firm and a monopoly price is set
• The contestable market model is a model of oligopolies where
barriers to entry and exit, not market structure, determine price
and output decisions and a competitive price is set
• Other models of oligopolies give price results between the two
extremes
The Cartel Model
A cartel model of oligopoly is a model that assumes that oligopolies
act as if they were a monopoly and set a price to maximize profit
• A cartel is a group of firms acting together to limit output,

raise price, and increase economic profit.
• Cartels are illegal but they do operate in some markets.
• Output quotas are assigned to individual member firms so
that total output is consistent with joint profit maximization
• If oligopolies can limit the entry of other firms, they can

increase profits
Cooperation and Cartels
If the firms in an oligopoly cooperate, they may earn more
profits than if they act independently.
Collusion, which leads to secret cooperative agreements,

is illegal in the few other countries, although it is legal and
acceptable in many other countries.
Price-Leadership Cartels may form in which firms simply

do whatever a single leading firm in the industry does. This
avoids strategic behavior and requires no illegal collusion.
Conditions necessary for a cartel to be stable
(maintainable):
There are few firms in the industry.
There are significant barriers to entry.
An identical product is produced.
There are few opportunities to keep actions secret.
There are no legal barriers to sharing agreements.
New Entry as a Limit on the Cartelization Strategy
and Price Wars
• The threat of outside competition limits oligopolies from
acting as a cartel
• The threat will be more effective if the outside competitor is
much larger than the firms in the oligopoly
• Price wars are the result of strategic pricing decisions gone
wild
• A predatory / destructive pricing strategy involves
temporarily pushing the price down in order to drive a
competitor out of business
OPEC as an Example of a Cartel
 OPEC: Organization of Petroleum Exporting Countries.
Attempts to set prices high enough to earn member countries

significant profits, but not so high as to encourage dramatic
increases in oil exploration or the pursuit of alternative
energy sources.
Controls prices by setting production quotas for member

countries.
Such cartels are difficult to sustain because members have

large incentives to cheat, exceeding their quotas.
Comparing Contestable Market model and Cartel
Models
The cartel model is appropriate for oligopolists that
collude, set a monopoly price, and prevent market entry
• The contestable market model describes oligopolies that set a
competitive price and have no barriers to entry
• Oligopoly markets lie between these two extremes
• Both models use strategic pricing decisions where firms set
their price based on the expected reactions of other firms
Implicit Price Collusion
Explicit (formal) collusion is illegal in most countries while
Implicit (informal) collusion is permitted
• Implicit price collusion exists when multiple firms make

the same pricing decisions even though they have not
consulted with one another
• Sometimes the largest or most dominant firm takes the
lead in setting prices and the others follow
Facilitating Practices
Facilitating practices are actions by oligopolistic firms
that can contribute to cooperation and collusion even
thought the firms do not formally agree to cooperate.
Cost-plus or mark-up pricing is a pricing policy

whereby a firm computes its average costs of
producing a product and then sets the price at some
percentage above this cost.
Why Are Prices Sticky?
One characteristic of informal collusive behavior is that

prices tend to be sticky – they don’t change frequently
• Informal collusion is an important reason why prices are

sticky
• Another is the kinked demand curve
• If a firm increases price, others won’t go along, so
demand is very elastic for price increases
• If a firm lowers price, other firms match the decrease,
so demand is inelastic for price decreases
The principle of the kinked demand curve rests on If the firm seeks to lower its price to The firm therefore, effectively faces
the principle that: gain a competitive advantage, its a ‘kinked demand curve’ forcing it to
rivals will follow suit. Any gains it maintain a stable or rigid pricing structure.
a. If a firm raises its price, its rivals will not
makes will quickly be lost and the
follow suit
% change in demand will be
Oligopolistic firms may overcome this by
b. If a firm lowers its price, its rivals will all do smaller than the % reduction in engaging in non-price competition.
the same price – total revenue would again
fall as the firm now faces a The kinked demand curve - an explanation for
Oligopoly relatively inelastic demand curve. price stability?
Price Assume the firm is charging a price of $5 and
producing an output of 100.
If it chose to raise price above $5, its rivals would not
follow suit and the firm effectively faces an elastic
demand curve for its product (consumers would buy
$5 from the cheaper rivals). The % change in demand
would be greater than the % change in price and TR
Total would fall.
Revenue B
Total Revenue A
D = elastic
Total Revenue B Kinked D Curve
D = Inelastic
100 Quantity
The Kinked Demand Curve Graph
P If P increases, others won’t
• A gap in the MR curve exists
go along, so D is elastic
• A large shift in marginal cost is
required before firms will change
their price
P MC1
MC2
Gap If P decreases, other firms
match the decrease, so D is
inelastic
MR D
Q
Q
16-68
The Kinked Demand Curve
Conclusion of Oligopoly
Competition between the few
May be a large number of firms in the industry but the
industry is dominated by a small number of very large
producers
Concentration Ratio – the proportion of total market
sales (share) held by the top 3,4,5, etc firms:
A 4 firm concentration ratio of 75% means the top 4
firms account for 75% of all the sales in the industry
71 Class Exercise
Q. The kinked demand curve in an oligopolistic

market is defined by the equations:
a) Derive equations for the marginal revenue

curves.
b) Determine the price and quantity at the "kink"
of the demand curve
End of Chapter -4

Managerial Economics CH 4

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Managerial Economics CH 4

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Rift Valley University

 R = PQ. • 𝑴𝑷𝑳 = = 𝜷𝑨𝑲𝜶 𝑳𝜷−𝟏

 π = R – C • Theory of Cost • Using Cobb–Douglas production function

 Mπ = Δπ/ΔQ = [π1 – π0 ]/[q1 – Q0 ] • TC = PkK0 + PLL

Chapter- Four: market structure and optimization

 conditions of entry and exit

 The four market structures

Type of Number Freedom of Nature of Examples Implications for

Perfect Very Homogeneous Cabbages, carrots Horizontal:

Monopolistic Many / Builders, Downward sloping,

Undifferentiated Cement Downward sloping.

Local water Downward sloping:

Type of Number Freedom of Nature of Examples Implications for

Perfect Very Homogeneous Cabbages, carrots Horizontal:

Monopolistic Very Builders, Downward sloping,

Undifferentiated Cement Downward sloping.

Local water Downward sloping:

Type of Number Freedom of Nature of Examples Implications for

Perfect Very Homogeneous Cabbages, carrots Horizontal:

Monopolistic Very Builders, Downward sloping,

Undifferentiated Cement Downward sloping.

Local water Downward sloping:

Type of Number Freedom of Nature of Examples Implications for

Perfect Very Homogeneous Cabbages, carrots Horizontal:

Monopolistic Very Builders, Downward sloping,

Undifferentiated Cement Downward sloping.

Local water Downward sloping:

Type of Number Freedom of Nature of Examples Implications for

Perfect Very Homogeneous Cabbages, carrots Horizontal:

Monopolistic Very Builders, Downward sloping,

Undifferentiated Cement Downward sloping.

Local water Downward sloping:

Type of Number Freedom of Nature of Examples Implications for

Perfect Very Homogeneous Cabbages, carrots Horizontal:

Monopolistic Very Builders, Downward sloping,

Undifferentiated Cement Downward sloping.

Local water Downward sloping:

 The demand curve for the industry is not perfectly elastic, it

 Therefore, the firm’s demand curve is a horizontal line at the

 Marginal revenue (MR) is the increase in total

 Since the price is constant in the perfect

Short Run Analysis of Profit Maximization

 Firms should produce if the difference between total revenue

Fixed cost in real life would be rent of the office, business

Therefore, fixed cost would be the loss of shut down at

Long Run Analysis

1. Entry and exit are the only long run adjustments.

P’ The industry is in a long run

Qe Q In the long run the firms make

LRAC = (SR)AC = (SR)MC = MR = AR

High degree of competition helps allocate

New idea? – firm makes short term abnormal

A monopoly is a firm that is the sole seller of a

2. The gov’t gives a single firm the exclusive right to produce

Example: 1000 homes

In a competitive market, the

A monopolist is the A monopolist’s

What is the relation 4 2.50

Like a competitive firm, a monopolist maximizes

So there is no supply curve for monopoly.

The market for

When the patent PC = MC

Competitive eq’m: Price Deadweight