170925 entrepreneurial economics2

Entrepreneurial Economics
A supplemental lecture on BMA5001
Organized by NUS MBA Entrepreneurship Club
29th September, 2017
2

Ryo’s Part
• Competitive Market
• In the short run
• In the long run
• Individual company and market
• Monopoly

Competitive Market
in the Short Run

Perfect Competition
• Firms are price taker
• Firms have no power to
decide the price to sell.
• Both buyers and sellers
have complete
information about price,
costs,…
• Firms are selling
identical(homogeneous)
products.

Competitive market
𝑃
𝑞
𝑞 𝑞 + 1
𝑃1
𝐴 𝐵
Demand curve = uniform price in every quantity.
Consumers in perfect Competitive market is
Perfect price elastic. Because if you charge $1 more,
No one buy from you.

Short-run
What is Short-run?
In short run,
- no entry, no exit
- k(capital) = fixed. (You cannot build new plants)
So, companies could change only quantity 𝑞
(We use 𝑞 as individual firm and 𝑄 for market)

Company aims maximize their profit.
What is Economic profit(𝜋)?
Profit is Total Revenue – Total (opportunity) Cost
𝜋 𝑞 = 𝑇𝑅 𝑞 − 𝑇𝐶 𝑞
In Economics, cost is excluding sunk cost
(sunk cost do not always equals to fixed cost)
Total Revenue is Price × quantity, so:
𝑇𝑅 𝑞 = 𝑃𝑞
Do you draw “Revenue” graph properly?

Before draw graph….
You can download worksheet here
https://www.dropbox.com/s/ydlnvacb2kchxve/170925_Entrepreneurial
%20Economics2_final%20-%20Worksheet.pdf?dl=0
• 𝑇𝑅(𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑃 × 𝑞
• 𝑀𝑅(𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) =
• 𝑇𝐶(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡) =
• 𝑀𝐶(𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡) =
• 𝜋(𝑃𝑟𝑜𝑓𝑖𝑡) =
• 𝐴𝑇𝐶 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 =
• 𝐴𝑉𝐶(𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡) =
Worksheet 1

Before draw graph….
• 𝑇𝑅(𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑃 × 𝑞
• 𝑀𝑅 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =
𝜕𝑇𝑅
𝜕𝑞
= 𝑃 in competitive market
• TC(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡) = 𝐹𝐶(𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡) + 𝑉𝐶(𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡)
• 𝑀𝐶 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 =
𝜕𝑇𝐶
𝜕𝑞
• 𝜋 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶
𝑇𝐶
𝑞
• 𝐴𝑉𝐶 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 =
𝑉𝐶
𝑞
I will explain it later, graphically and mathematically.

𝑃𝑟𝑖𝑐𝑒 = 50, 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 = 100, 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑠𝑡 = 50𝑞 − 11𝑞2
+ 𝑞3
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Worksheet 2

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Revenue
𝑇𝑅(𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑃𝑟𝑖𝑐𝑒 × 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 50𝑞
𝑞

Marginal – the key concept of economics.
Δ𝑋
Δ𝑞
, 𝑜𝑟
𝜕𝑋
𝜕𝑞
𝑋
𝑞
𝑞 𝑞 + 1
Δ𝑞
𝑋(𝑞)
𝑋(𝑞 + 1)
Δ𝑋
If I change quantity, how X changes?

Why Marginal is important?
𝑀𝐶 < 𝑀𝑅
We can decide change quantity or not.
If 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 < 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒,
We should produce more.
While 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 > 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒,
We shouldn’t produce more.
So, in general, when MC = MR, 𝜋 𝑚𝑎𝑥
Do you draw “MR” graph?
𝑀𝐶 > 𝑀𝑅

+ 𝑞3
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Revenue MR
𝑀𝑅 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =
𝜕𝑇𝑅
𝜕𝑞
=
𝜕(𝑃 × 𝑞)
𝜕𝑞
= 𝑃𝑟𝑖𝑐𝑒
𝑀𝑅 = 𝑡𝑎𝑛𝑔𝑒𝑛𝑡 𝑜𝑓 𝑇𝑅
𝑞
In Competitive Market, firms are price taker
So, 𝑀𝑅 = 𝑃𝑟𝑖𝑐𝑒.
Which means,
consumers are perfectly price elastic( 𝒆 = ∞).
Why?
If you charge $1 more in competitive market,
Consumers buy things from another firm.
Remember Amazon Market Place.
Remember, Marginal is: if I change
quantity, how X is changed.
So, if you sell +1,
you got +P revenue.

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Revenue TotalCost MR Profit
Do you draw
“Total Cost”
and
“MC (Marginal Cost)”
graph properly?

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TotalCost
TotalCost = 𝐹𝐶 + 𝑉𝐶
= 100 + 50𝑞 − 11𝑞2 + 𝑞3
𝑞

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TotalCost MC
𝑀𝐶 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶ost =
𝜕𝑇𝐶
𝜕𝑞
= 50 − 22𝑞 + 3𝑞2
MC = Tangent of Total Cost
𝑞
Next, Profit graph!

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Revenue TotalCost Profit
𝑃𝑟𝑜𝑓𝑖𝑡: 𝜋(𝑞) = 𝑇𝑅 − 𝑇𝐶
= 𝑃𝑞 − 100 + 50𝑞 − 11𝑞2
+ 𝑞3
= −100 + 11𝑞2
− 𝑞3
𝑞

+ 𝑞3
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= 𝑃𝑞 − 100 + 50𝑞 − 11𝑞2
+ 𝑞3
= −100 + 11𝑞2
− 𝑞3
At Point A and C, 𝜋(𝑞) = 0
At Point B 𝜋(𝑞) = 𝑀𝐴𝑋
A C
B

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= 𝑃𝑞 − 100 + 50𝑞 − 11𝑞2
+ 𝑞3
= −100 + 11𝑞2
− 𝑞3
B
This Point B is
exactly same as…

+ 𝑞3
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MC MR
B
𝑀𝐶(𝑞 𝐵) = 𝑀𝑅 (= 𝑃𝑟𝑖𝑐𝑒)
50 − 22𝑞 + 3𝑞2
= 50
𝑞 =
22
3
This Point B is
exactly same as…

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Revenue TotalCost MC MR Profit
B
50 − 22𝑞 + 3𝑞2
= 50
𝑞 =
22
3
This Point B is
exactly same as…

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Revenue TotalCost MC MR Profit
B
These are mathematically same:
1)
𝜋(𝑞) = 𝑇𝑅 − 𝑇𝐶
When 𝜋 𝑞 = 𝑚𝑎𝑥,
𝜕𝜋 𝑞
𝜕𝑞
= 0
2)Profit is max when
𝜕𝑇𝑅
𝜕𝑞
=
𝜕𝑇𝐶
𝜕𝑞
↔ 𝑀𝑅 = 𝑀𝐶
The latter is simpler because
We know MR = Price.

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AVC ATC
+ 𝑞3
ATC(Average Total Cost) =
𝑇𝐶
𝑞
= 50 − 11𝑞 + 𝑞2 +
100
𝑞
AVC(Average Variable Cost) =
𝑉𝐶
𝑞
= 50 − 11𝑞 + 𝑞2

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ATC MC
+ 𝑞3
ATC is MIN
Where
ATC = MC

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AVC MC
+ 𝑞3
AVC is MIN
Where
AVC = MC

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AVC ATC MC MR
+ 𝑞3
MIN AVC and
MIN ATC is not
MC=MR(=P)
In general.

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Revenue TotalCost VC AVC ATC MC MR
+ 𝑞3
If the company
seek maximum profit,
Where is revenue?
Where is profit?
Worksheet 3
𝑅
𝑇𝐶 𝑉𝐶 𝑀𝐶
𝐴𝑇𝐶
𝐴𝑉𝐶

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+ 𝑞3
Step1:
Find
𝑀𝐶 𝑞 𝑜𝑝𝑡 = 𝑀𝑅
𝑞 𝑜𝑝𝑡

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+ 𝑞3
Step1:
Find
Step2:
This 𝑇𝑅(𝑞 𝑜𝑝𝑡) or
The area 𝑃 × 𝑞 𝑜𝑝𝑡 is
a Revenue
𝑞 𝑜𝑝𝑡
𝑇𝑅(𝑞 𝑜𝑝𝑡)
𝑞 =
22
3
𝑇𝑅 = 𝑃𝑞 =
1100
3

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+ 𝑞3
Step1:
Find
Step2:
This T𝑅(𝑞 𝑜𝑝𝑡) or
a Revenue
Step3:
Total Cost is 𝑇𝐶(𝑞 𝑜𝑝𝑡)
Or The area
𝐴𝑇𝐶(𝑞 𝑜𝑝𝑡) × 𝑞 𝑜𝑝𝑡
𝑞 𝑜𝑝𝑡
𝑇𝐶(𝑞 𝑜𝑝𝑡)

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+ 𝑞3
Step1:
Find
Step2:
This 𝑇𝑅(𝑞 𝑜𝑝𝑡) or
a Revenue
Step3:
Total Cost is 𝑇𝐶(𝑞 𝑜𝑝𝑡)
Or The area 𝐴𝑇𝐶 × 𝑞 𝑜𝑝𝑡
Step4:
The profit is 𝑇𝑅 − 𝑇𝐶
Or
The Area
(𝑃 − 𝐴𝑇𝐶(𝑞 𝑜𝑝𝑡)) × 𝑞 𝑜𝑝𝑡
𝑞 𝑜𝑝𝑡
𝑇𝐶(𝑞 𝑜𝑝𝑡)
profit

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VC AVC ATC MC MR
+ 𝑞3
Pick up:
a Total Revenue
The area 𝐴𝑇𝐶 × 𝑞 𝑜𝑝𝑡
is a Cost
The Area
Is a Profit
𝑞 𝑜𝑝𝑡
For explanation purpose,
I changed the scale of P-axis
𝐶𝑜𝑠𝑡 =
𝐴𝑇𝐶(𝑞 𝑜𝑝𝑡) × 𝑞 𝑜𝑝𝑡
𝑃𝑟𝑜𝑓𝑖𝑡

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ATC MC MR
+ 𝑞3
𝑞 𝑜𝑝𝑡
Pick up:
a Total Revenue
The area 𝐴𝑇𝐶 × 𝑞 𝑜𝑝𝑡
is a Cost
The Area
Is a Profit
We only need these
3 curves.

Check every equation:
For 𝑃(𝑃𝑟𝑖𝑐𝑒) = 50, 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 = 100, 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑠𝑡 = 50𝑞 − 11𝑞2 + 𝑞3
• 𝑇𝑅(𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑃 × 𝑞 = 50𝑞
• 𝑀𝑅(𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑃
• TC(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡) = 𝐹𝐶 + 𝑉𝐶 = 100 + 50𝑞 − 11𝑞2
+ 𝑞3
𝜕𝑇𝐶
𝜕𝑞
= 50 − 22𝑞 + 3𝑞2
• 𝜋 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶 = −100 + 11𝑞2 − 𝑞3
𝑇𝐶
𝑞
=
100
𝑞
+ 50 − 11𝑞 + 𝑞2
𝑉𝐶
𝑞
= 50 − 11𝑞 + 𝑞2

Download and Check Excel
• https://www.dropbox.com/s/7w91ks1jiyvrprz/eshipVC3%20-
%20forhandout.xlsx?dl=0
• Sheet Competitive Market
• In group 3-5 ppl, let’s share your finding in 3-5min.

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VC AVC ATC MC
𝑆ℎ𝑢𝑡𝑑𝑜𝑤𝑛 𝑅𝑢𝑙𝑒
I𝐟
𝑃 < 𝐴𝑉𝐶,
Company couldn’t
Make profit nor
Reduce loss of FC.
So, shutdown.
So, where is the firm’s
Supply curve?
𝑞 𝑜𝑝𝑡

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VC AVC ATC MC
𝑆ℎ𝑢𝑡𝑑𝑜𝑤𝑛 𝑅𝑢𝑙𝑒
I𝐟
𝑃 < 𝐴𝑉𝐶,
Company couldn’t
Make profit nor
Reduce loss of FC.
So, shutdown.
So, where is the firm’s
Supply curve?
Here!
Because MC=Price.
𝑞 𝑜𝑝𝑡

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VC AVC ATC MC
Imagine, suddenly the price drops
𝑃 = $26
(1)How many you should produce?
(2)What is your revenue?
(3)What is your profit?
(4)Should you shut down?
(5)if you compare the profit with
𝑞 = 0,5, 𝑎𝑛𝑑 7
what do you think?
𝑞 𝑜𝑝𝑡
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 = 100, 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑠𝑡 = 50𝑞 − 11𝑞2
+ 𝑞3 Worksheet 4

Imagine, suddenly the price drops 𝑃 = $26.
(1) How many you should produce?
𝑀𝐶 = 𝑃, so 50 − 22𝑞 + 3𝑞2 = 26 ↔ 𝒒 = 𝟔
(2) What is your revenue?
𝑇𝑅 = 𝑃 × 𝑞 = $26 × 6 = $𝟏𝟓6
(3) What is your profit?
𝜋 = 𝑇𝑅 − 𝑇𝐶 = $156 − 100 + 50𝑞 − 11𝑞2 + 𝑞3 = $156 − $220 = −$𝟔𝟒
You lose money.
No. because 𝐴𝑉𝐶(𝑞 = 6) = 50 − 11𝑞 + 𝑞2 = $20 and 𝑃 = $26 > 𝐴𝑉𝐶(𝑞 = 6)
(5) if you compare the profit with 𝑞 = 0 and 𝑞 = 5,7 what do you think?

Imagine, suddenly the price drops 𝑃 = $26.
(1) How many you should produce?
𝑀𝐶 = 𝑃, so 50 − 22𝑞 + 3𝑞2 = 26 ↔ 𝒒 = 𝟔
(2) What is your revenue?
𝑇𝑅 = 𝑃 × 𝑞 = $26 × 6 = $𝟏𝟓6
(3) What is your profit?
𝜋 = 𝑇𝑅 − 𝑇𝐶 = $156 − 100 + 50𝑞 − 11𝑞2 + 𝑞3 = $156 − $220 = −$𝟔𝟒
You lose money.
No. because 𝐴𝑉𝐶(𝑞 = 6) = 50 − 11𝑞 + 𝑞2 = $20 and 𝑃 = $26 > 𝐴𝑉𝐶(𝑞 = 6)
(5) if you compare the profit with 𝑞 = 0 and 𝑞 = 5 what do you think?
If 𝑞 = 0, T𝑅 = $26 × 0 = 0, so 𝜋 = 𝑇𝑅 − 𝑇𝐶 = 0 − 𝑇𝐶 = −$𝟏𝟎𝟎
If 𝑞 = 5, T𝑅 = $26 × 5 = 130, so 𝜋 = 𝑇𝑅 − 𝑇𝐶 = 130 − (100 + 50𝑞 − 11𝑞2
+ 𝑞3
) = −$𝟕𝟎
If 𝑞 = 7, T𝑅 = $26 × 7 = 182, so 𝜋 = 𝑇𝑅 − 𝑇𝐶 = 182 − (100 + 50𝑞 − 11𝑞2 + 𝑞3) = −$𝟕𝟐
So, if we produce 𝑞 = 6, we lose money $64, But this is still better off than other quantity.
This is why we should not shut down if 𝑷 > 𝑨𝑽𝑪(𝒔𝒉𝒖𝒕𝒅𝒐𝒘𝒏 𝒓𝒖𝒍𝒆)
𝒃𝒆𝒕𝒕𝒆𝒓 𝒕𝒉𝒂𝒏 𝒅𝒐 𝒏𝒐𝒕𝒉𝒊𝒏𝒈!

Individual firm and market supply
Q=1 Q=2 Q=3 Q=4
David 40 50 80 100
Joe - 40 50 80
Imagine, there are only two producers in the world.
And they could produce following Marginal
Cost(=individual supply curve)
Could you draw a individual supply curve?
𝑄
𝑃
$100
80
50
40
1 2 3 4 5 6 7 8
𝑃
$100
80
50
40
1 2 3 4
𝑞
individual
Worksheet 5

𝑃
$100
80
50
40
1 2 3 4
𝑞
MC Q=1 Q=2 Q=3 Q=4
David 40 50 80 100
Joe - 40 50 80
Could you draw a Market supply curve?
𝑄
𝑃
$100
80
50
40
1 2 3 4 5 6 7 8
Market
individual

𝑃
$100
80
50
40
1 2 3 4
𝑞
Q=1 Q=2 Q=3 Q=4
David 40 50 80 100
Joe - 40 50 80
Could you draw a Market supply curve?
𝑄
𝑃
$100
80
50
40
1 2 3 4 5 6 7 8
1 + 2 = 3
3 + 4 = 7
2 + 3 = 5
Market
Just horizontal (where same price) sum over the quantity!

Let’s draw graph: AVC, ATC, MC when 𝐹𝐶 = 10, 𝑉𝐶 = 0.75𝑞2
Average Variable Cost, Average Total Cost, and Marginal Cost.
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𝐴𝑇𝐶 =
𝑇𝐶
𝑞
𝑀𝐶 =
𝜕𝐶
𝜕𝑞
𝐴𝑉𝐶 =
𝑉𝐶
𝑞
Ex1

When 𝐹𝐶 = 10, 𝑉𝐶 = 0.75𝑞2
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AVC ATC MC
𝐴𝑇𝐶 =
𝐹𝐶 + 𝑉𝐶
𝑞
=
10
𝑞
+ 0.75𝑞
𝑀𝐶 =
𝜕𝐶
𝜕𝑞
= 1.5𝑞
𝐴𝑉𝐶 =
𝑉𝐶
𝑞
= 0.75𝑞
Ex1

Let’s write down graph: AVC, ATC, MC when
𝐹𝐶 = 10, 𝑉𝐶 = 4𝑞 − 𝑞2
+ 0.1𝑞3
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𝐴𝑇𝐶 =
𝑇𝐶
𝑞
𝑀𝐶 =
𝜕𝐶
𝜕𝑞
𝐴𝑉𝐶 =
𝑉𝐶
𝑞
Ex2

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AVC ATC MC
𝐴𝑇𝐶 =
𝐹𝐶 + 𝑉𝐶
𝑞
=
10
𝑞
+ 4 − 𝑞 + 0.1𝑞2
𝑀𝐶 =
𝜕𝐶
𝜕𝑞
= 4 − 2𝑞 + 0.3𝑞3
𝐴𝑉𝐶 =
𝑉𝐶
𝑞
= 4 − 𝑞 + 0.1𝑞2
Let’s write down graph: AVC, ATC, MC when
𝐹𝐶 = 10, 𝑉𝐶 = 4𝑞 − 𝑞2
+ 0.1𝑞3
Ex2

Competitive Market
in the Long Run

Short Run: Shut down condition
𝑃𝑟𝑖𝑐𝑒 < 𝐴𝑉𝐶(𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡)
Long Run: Shut down condition
𝑃𝑟𝑖𝑐𝑒 < 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡
Because there are no fixed cost in the long run.
(sell and buy fixed asset in the long run)

Long Run: There are entry and exit
In competitive market, in the long run,
it drives profit to zero.
Cite: https://courses.edx.org/courses/course-v1:MITx+14.100x+3T2016/courseware/65ca1e8e024b4e0aae5d764b31942021/510230ecf173432786c678ab0591cf5d/?activate_block_id=block-
v1%3AMITx%2B14.100x%2B3T2016%2Btype%40sequential%2Bblock%40510230ecf173432786c678ab0591cf5d
If firms making profit,
Another company will
enter into the market in
the long run. So the
supply curve become
flatten(𝑆𝑅1 → 𝑆𝑅2).
The Price will decrease
(𝑃1 → 𝑃2)
And Individual firm lose
quantity(𝑞1 → 𝑞2)

Long Run: There are entry and exit
In competitive market, in the long run,
it drives profit to zero.
Cite: https://courses.edx.org/courses/course-v1:MITx+14.100x+3T2016/courseware/65ca1e8e024b4e0aae5d764b31942021/510230ecf173432786c678ab0591cf5d/?activate_block_id=block-
v1%3AMITx%2B14.100x%2B3T2016%2Btype%40sequential%2Bblock%40510230ecf173432786c678ab0591cf5d
𝑆𝑅3
𝑄3𝑞3
𝜋3 = 0
More entry till the
profit=0
This point is most
efficient to produce
because ATC is MIN.

Short Run Cost VS Long Run Cost
In the short run, your Average Total Cost is like this:
Heavy fixed cost Over Capacity
- Overtime rate charge
- Diminishing Productivity
Your work is digging a hole.
Your company has only 1 scoop.
Due to high demand, your firm
decide to hire +1 worker.
But there are no scoop.

In the Long run, your firm could build new plant
Because you could use Capital(K)
Huge plant needs
More cost at first.
They are more productive.
But still have limitation.

If we made 3 plants in the long run, our cost curve is
Yellow dotted line.

But in the long run, managers could decide build a plant with target
quantity in every K(capital) level.
Which means there are infinite option. So the Yellow dotted line is
LRMC.
In general this is more efficient (low price same quantity) for firms
than SRMC.

Monopolistic Market
• Government sometimes allows monopoly
to infrastructure companies.
• Ex: Electric Power Company, Telecom
Company, Post Office,…
• Only one seller and many buyers.
• No close substitutes
• Barriers to entry
• Monopolistic Company is Price Maker.

Monopolistic Market
The firm is price maker, but they are not almighty.
Because consumers could react. If you set $100 for an ordinal candy,
no one want to buy it so company couldn’t make profit.
• 𝜋 = 𝑇𝑅 − 𝑇𝐶
•
𝜕𝜋
𝜕𝑄
= 𝑀𝑅 − 𝑀𝐶 = 0 ⇒ 𝜋 𝑚𝑎𝑥
• This when 𝜋 𝑚𝑎𝑥 ⇒ 𝑀𝑅 = 𝑀𝐶 rule is still same as monopoly.

Competitive market VS Monopolistic Market
𝑃
𝑞
𝑞 𝑞 + 1
𝑃1
𝐴 𝐵
Demand curve
Consumers in Competitive market is
Perfect price elastic.
So, 𝑀𝑅 = 𝑃1 (𝑞 + 1) − 𝑞 = 𝐵
𝑃
𝑄
Q 𝑄 + 1
𝑃1
𝐴 𝐵
Demand curve
𝐶
𝑃2
Consumers in Monopolistic market is
moderate price elastic.
So, 𝑀𝑅 =
Δ𝑅
Δ𝑄
=
(𝑃2 𝑄+1 −𝑃1 𝑄)
𝑄+1 −𝑄
= 𝐵 − 𝐶
So, monopolist lose revenue sometimes when they produce and sell more.

Monopolistic Market Example
• Demand Curve is 𝑄 𝐷 𝑃 = 20 − 𝑃
(1)What is MR for monopolist?
(2)Draw MR and Demand Curve
𝑃
𝑄
20
20
10
10
Worksheet 6

• Demand Curve is 𝑄 𝐷 𝑃 : 𝑃 = 20 − 𝑄
↔ 𝑃 = 20 − 𝑄
• 𝑇𝑅 = 𝑃𝑄
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
you can rewrite it if you like: (= 𝑃 + 𝑄
𝜕𝑃
𝜕𝑄
)
• here, we differentiate by Q. so, we would like
to re-write TR by TR(Q)
• 𝑇𝑅 = 𝑃𝑄 = 20 − 𝑄 × 𝑄 = 20𝑄 − 𝑄2
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
=
𝜕(20𝑄−𝑄2)
𝜕𝑄
= 20 − 2𝑄
𝑃
𝑄
20
Demand curve
20
10
10
MR
Worksheet 6

[advanced] Monopolistic and competitive
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
you can rewrite it if you like: (= 𝑃 + 𝑄
𝜕𝑃
𝜕𝑄
)
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
= 𝑃 + 𝑄
𝜕𝑃
𝜕𝑄
If competitive market,
This term is 0
So, 𝑀𝑅 = 𝑃
Worksheet 6

[advanced] Monopolistic and competitive
• In addition to that, we know
Elasticity 𝑒 =
Δ𝑄/𝑄
Δ𝑃/𝑃
=
P
Q
ΔQ
ΔP
So, transform MR to this form:
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
= 𝑃 + 𝑄
𝜕𝑃
𝜕𝑄
= 𝑃 + 𝑄
𝑃
𝑃
𝜕𝑃
𝜕𝑄
• = 𝑃 + 𝑃
𝑄
𝑃
𝜕𝑃
𝜕𝑄
• This is
1
𝑒
so, 𝑴𝑹 = 𝑷(𝟏 +
𝟏
𝒆
)
• And if 𝑒 ⇒ ∞(Competitive Market),
1
𝑒
⇒ 0 𝑠𝑜 𝑀𝑅 ⇒ 𝑃

Monopolistic Market
The firm is price maker, but they are not almighty.
Because consumers could react. If you set $100 for an ordinal candy,
no one want to buy it so company couldn’t make profit.
• 𝜋 = 𝑇𝑅 − 𝑇𝐶
•
𝜕𝜋
𝜕𝑄
= 𝑀𝑅 − 𝑀𝐶 = 0 ⇒ 𝜋 𝑚𝑎𝑥
• 𝝅 𝒎𝒂𝒙 ⇒ 𝑴𝑹 = 𝑴𝑪 rule is still same as monopoly.

↔ 𝑃 = 20 − 𝑄
• We know
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
=
𝜕(20𝑄−𝑄2)
𝜕𝑄
= 20 − 2𝑄
So, If Cost function is 𝐓𝐂 = 𝟐 + 𝑸 𝟐
• A monopolist will supply what quantity at
what price?
𝑃
𝑄
20
Demand curve
20
10
10
MR
Worksheet 6-2

↔ 𝑃 = 20 − 𝑄
• We know
• 𝑀𝑅 =
𝜕𝑃𝑄
𝜕𝑄
=
𝜕(20𝑄−𝑄2)
𝜕𝑄
= 20 − 2𝑄
• TC = 2 + 𝑄2
• MC=
𝜕𝑇𝐶
𝜕𝑄
= 2𝑄
• When MR=MC, that is 20 − 2𝑄＝2𝑄
• 𝑄 = 5, 𝑃 = 20 − 𝑄 = 15
𝑃
𝑄
20
Demand curve
20
10
10
MR
𝑀𝐶 = 2𝑄
5
15

We know
and 𝑇𝐶 = 2 + 𝑄2
What is the Revenue, Cost, and Profit?
• If we produce Q=3,4,…7
How our Revenue /Profit Changes?
• What is DWL(Deadweight Loss)?
𝑃
𝑄
20
Demand curve
20
10
10
MR
𝑀𝐶 = 2𝑄
5
15
Q TR TC 𝜋
3
4
5
6
7
Worksheet 6-3

↔ 𝑃 = 20 − 𝑄
• 𝑇𝑅 = 𝑃𝑄 = 20𝑄 − 𝑄2
• TC = 2 + 𝑄2
𝑃
𝑄
20
Demand curve
20
10
10
MR
𝑀𝐶 = 2𝑄
5
15
Q TR TC 𝜋
3 51 11 40
4 64 18 46
5 75 27 48
6 84 38 46
7 91 51 40
Worksheet 6-3
𝐷𝑊𝐿

Monopolistic Market Example 2
• Cost Function is: TC = 12 + 𝑄2
1. A monopolist will supply what quantity
at what price?
2. Draw, Demand Curve, MR, MC
3. Then Draw AVC, ATC
4. Show on the graph, Revenue and Profit
0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
AVC ATC Demand MR MC𝑃
𝑄
Worksheet 7

• Cost Function is: TC = 12 + 𝑄2
1. A monopolist will supply what quantity at
what price?
2. Draw, Demand Curve, MR, MC
3. Then Draw AVC, ATC
4. Show on the graph, Revenue and Profit
HINT:
• 𝑇𝑅(𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑃 × 𝑄
• 𝑀𝑅(𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) =
𝜕𝑇𝑅
𝜕𝑄
𝜕𝑇𝐶
𝜕𝑄
• 𝜋 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶
𝑇𝐶
𝑄
𝑉𝐶
𝑄 0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
AVC ATC Demand MR MC
Worksheet 7

Given, Demand Curve is 𝑸 𝑫 𝑷 : 𝑷 = 𝟐𝟒 − 𝑸
Cost Function is: 𝑻𝑪 = 𝟏𝟐 + 𝑸 𝟐
• 𝑇𝑅 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃 × 𝑄 = 24𝑄 − 𝑄2
𝜕𝑇𝑅
𝜕𝑄
= 24 − 2𝑄
𝜕𝑇𝐶
𝜕𝑄
= 2𝑄
0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Worksheet 7

𝜕𝑇𝑅
𝜕𝑄
= 24 − 2𝑄
𝜕𝑇𝐶
𝜕𝑄
= 2𝑄
𝜋 𝑚𝑎𝑥 ⇒ 𝑀𝑅 = 𝑀𝐶
24 − 2𝑄 = 2𝑄
↔ 𝑄 = 6
So, what’s next?
How to figure out Price?
Remember, monopolist is not almighty.
The firm should respect Demand curve.
0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Demand MR MC
Worksheet 7

𝜕𝑇𝑅
𝜕𝑄
= 24 − 2𝑄
𝜕𝑇𝐶
𝜕𝑄
= 2𝑄
𝜋 𝑚𝑎𝑥 ⇒ 𝑀𝑅 = 𝑀𝐶
24 − 2𝑄 = 2𝑄
↔ 𝑄 = 6
So, what’s next?
How to figure out Price?
Remember, monopolist is not almighty.
The firm should respect Demand curve.
So, Graphically, here is a price!
Mathematically, assign Q=6 to
Demand Curve 𝑷 = 𝟐𝟒 − 𝑸 so, 𝑃 = 18
0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Demand MR MC
here
Worksheet 7

• 𝑃 = 18, 𝑄 = 6
• 𝜋 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶 = 60
• 𝑇𝑅 = 144 − 36 = 108
• 𝑇𝐶 = 48
Next, ATC, AVC
0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Demand MR MC
18
Worksheet 7

0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Next, ATC
𝑇𝐶 = 12 + 𝑄2
𝑇𝐶
𝑄
=
12
𝑄
+ 𝑄
𝑉𝐶
𝑄
= 𝑄
Next, Where is Revenue, Cost and Profit?
18
Variable Cost
Fixed Cost
Worksheet 7-2

0
5
10
15
20
25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
𝑃 = 1818
𝑇𝑅 = 𝑃 × 𝑄
= 18 × 6 = 108
𝑇C =
ATC × 𝑄
= 8 × 6 = 48
𝑄
Rest of them are profit.
You can simulate on excel.
Worksheet 7-2
𝐴𝑇𝐶 =
𝑇𝐶
𝑄
=
12
𝑄
+ 𝑄
𝑎𝑠𝑠𝑖𝑔𝑛 𝑄 = 6

Download and Check Excel
• https://www.dropbox.com/s/7w91ks1jiyvrprz/eshipVC3%20-
%20forhandout.xlsx?dl=0
(same excel as before)
• Sheet Monopoly
• In group 3-5 ppl, let’s share your finding in 3-5min.

Problem solving procedure.
For Competitive Market For Monopoly Market
Step1: Find out optimal quantity, which means find 𝑞 𝑜𝑝𝑡 where profit 𝜋 𝑞 𝑜𝑝𝑡 = 𝑚𝑎𝑥.
• 𝑞 𝑜𝑝𝑡 is where Marginal Revenue equals to Marginal Cost. Which is 𝑀𝑅 = 𝑀𝐶
• 𝑀𝐶 =
𝜕𝑇𝐶
𝜕𝑞
=
𝜕𝑉𝐶
𝜕𝑞
, where TC=Total Cost, VC=Variable Cost.
𝑀𝑅 = 𝑃(price)
To know 𝑀𝑅 =
𝜕𝑇𝑅
𝜕𝑄
, We should calculate T𝑅 = 𝑃 × Q
We know Demand Curve 𝑃 𝑄 = 𝒂 − 𝒃𝑸 (or 𝑄2
or something)
To differentiate by 𝑄, we use 𝒂 − 𝒃𝑸 as 𝑃 to earn TR.
So T𝑅 = 𝑃 × Q = 𝒂 − 𝒃𝑸 × 𝑄 = 𝑎𝑄 − 𝑏𝑄2, so we’ll have MR.
Solve 𝑀𝑅 = 𝑀𝐶, we got optimal 𝑄 𝑜𝑝𝑡
Step2: Find out optimal Total Revenue(TR), Total Cost(TC), and Profit (𝜋).
First of all, we need Price 𝑃.
We already know Price 𝑃
Find out 𝑃𝑜𝑝𝑡 using Demand Curve.
Assign 𝑄 𝑜𝑝𝑡 to 𝑃 𝑄 = 𝒂 − 𝒃𝑸, we got 𝑃𝑜𝑝𝑡
Using 𝑇𝑅 𝑜𝑝𝑡 = 𝑃𝑜𝑝𝑡 × Qopt, 𝑇𝐶 𝑜𝑝𝑡 = 𝑇𝐶(Qopt), we get TR and TC.
To know TC, we could use Average Total Cost 𝐴𝑇𝐶. 𝐴𝑇𝐶 𝑄 𝑜𝑝𝑡 × 𝑄 𝑜𝑝𝑡 = 𝑇𝐶 𝑜𝑝𝑡
𝜋 𝑞 𝑜𝑝𝑡 = 𝑇𝑅 𝑜𝑝𝑡 − 𝑇𝐶 𝑜𝑝𝑡.

If you want to know more, check Entrepreneurial Economics #1
• https://www.slideshare.net/ryouen/170902-entrepreneurial-
economics-v4-80086316
• Covered:
• Price Elasticity
• Demand / Supply curve shift
• Welfare and Deadweight Loss
• Marginal Rate of Substitute and indifference curve

Reference
NUS MBA BMA5001 Lecture Note 3, 6, 7
Principles of Microeconomics (Mankiw's Principles of Economics)
MITx: 14.100x Microeconomics
https://en.wikiquote.org/wiki/Greg_Mankiw#Ch._1._Ten_Principles_of_Economics
Amazon.com

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