Four Market Models and Pure Competition

Pure/perfect competition

A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers.

Pure monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.

Monopolistic competition

A market structure in which many firms sell a differentiated product, entry is relatively easy, each firm has some control over its product price, and there is considerable nonprice competition.

Oligopoly

A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.

Imperfect competition

All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly.

Price taker

A seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).

Average revenue

Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.

Total revenue

The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.

Marginal revenue

The change in total revenue that results from the sale of 1 additional unit of a firm’s product; equal to the change in total revenue divided by the change in the quantity of the product sold.

Break-even profit

An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit.

MR=MC rule

The principle that a firm will maximize its profit (or minimize its loss) 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.

Short-run supplyc curve

A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm’s short-run marginal cost curve that lies above its average-variable-cost curve.

Fallacy of composition

The false notion that what is true for the individual (or part) is necessarily true for the group (or whole).

Marginal revenue

The change in total revenue that results from the sale of 1 additional unit of a firm’s product; equal to the change in total revenue divided by the change in the quantity of the product sold.

Long run supply

A schedule or curve showing the prices at which a purely competitive industry will make various quantities of its product available in the long run.

Constant-cost industry

An industry in which the entry and exit of firms have no effect on the prices that firms in the industry must pay for resources and thus no effect on production costs.

Increasing cost industries

An industry in which expansion through the entry of new firms raises the prices that firms in the industry must pay for resources and therefore increases their production costs.

Decreasing cost industries

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

Productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized.

Allocative efficiency

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.

Consumer surplus

The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.

Producer surplus

The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.

Creative destruction

The hypothesis that the creation of new products and production methods destroys the market power of firms committed to existing products and older ways of doing business.