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Pure competition
Very large number of firms producing a standardized product. New firms enter and exit easily. Firms are price takers (must accept market price)
Pure monopoly
Market structure in which one firm is the sole seller of a product or service. Entry of add. Firms is blocked. Monopoly firm produces a single unique product and has full control over that product’s price
Monopolistic competition
Large number of sellers producing differentiated products. Widespread non-price competition ex. Design, workmanship. Easy entry and exit. Monopolistically competitive firms control some prices
Oligopoly
A few sellers of standardized or differentiated product. Each firm is affected by rivals’ decisions and must take those into account in determining its own price and output.
Perfectly elastic
Purely competitive demand
P = AR = MR
Pure competition price
TR = PxQ
Pure competition total revenue
MR = change in TR / change in Q
Pure competition marginal revenue
Where total revenue exceeds total cost
When is pure competition’s firm’s profit maximized?
MR = MC rule
Principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
Constant-cost industry
Pure competition - entry and exit of firms do not affect resource prices or the individual firms’ ATC curves
Eliminates
Entry _____ economic profits
Short
Can only operate at a loss in the _____ term
Short run supply curve
As long as P exceeds
minimum AVC, the firm continues to produce using
the rule:
MR (= P) = MC
Supply graphs as upsloping line.
In the long run:
Firms can expand or contract capacity.
• Firms can enter or exit the industry.
Constant-cost industry
Entry and exit of firms does not affect resource prices
Long-Run Adjustment Process
• Firms seek profits and shun losses.
• Firms are free to enter or to exit.
• Production will occur at firm’s minimum average total cost.
• Price will equal minimum average total cost.
Entry eliminates profits:
• Firms enter
• Supply increases
• Price falls
Exit eliminates losses:
• Firms leave
• Supply decreases
Price rises
Increasing-cost industry:
Cause entry + exit
• Most industries
• LR ATC increases with expansion
• Specialized resources
Decreasing cost industry
Abundant resource that doesn’t cost much. Firms experience lower costs as their industry expands
Productive efficiency
given the available inputs and technology, it’s impossible to produce more of one good without decreasing the quantity of another good that’s produced. Producing where P = minimum ATC.
Allocative efficiency
the particular mix of goods a society produces represents the combination that society most desires. Producing where P = MC.
Consumer surplus + producer surplus is at max
When P = MC = lowest ATC for individual firms…
Productive and allocative efficiency
Long -run equilibrium in pure competition guarantees…
Pure monopoly’s barriers to entry
Economies of scale
• Legal barriers to entry like patents and licenses
• Ownership or control of essential resources
• Pricing and other strategic barriers
Monopoly demand
The pure monopolist is the industry.
Monopolist demand curve is the market demand curve.
Demand curve is downward sloping.
Marginal revenue is less than price.
Monopolist
…sets price in the elastic region of the demand curve
Monopoly pricing
Not the highest price, but the best profit
