Perfect Competition and Monopoly

Flashcards on Perfect Competition and Monopoly

Price taker

The firm is a price taker and cannot influence the price of the good or service that it produces.

MR = P

In Perfect Competition, marginal revenue equals price.

TR - TC

Total revenue minus total cost, determines profit maximizing output.

MR = MC

Marginal analysis, determines profit maximizing output.

If MR > MC

The firm should increase output.

If MR < MC

The firm should reduce output.

P < ATC

If firm shuts down, it faces a loss equivalent to total fixed costs per day.

Firm’s Supply Curve

Firm’s supply curve is the same as the MC curve at prices above the minimum point of AVC.

Short Run Market Equilibrium

Economic profits

Long Run Market Equilibrium

Normal or Zero-economic profits

Monopoly

A market with one seller, no close substitutes, and barriers to entry.

How Monopoly Arises

No close substitutes, Barriers to entry.

Natural Monopoly

Economies of Scale

Legal Monopoly

Govt franchises/licenses, Utilities; Casinos.

MR = MC

The profit maximization condition.

Monopoly and Perfect Competition

Underproduction creates a deadweight loss, consumer surplus shrinks, producer surplus expands

Key idea behind price discrimination

Convert consumer surplus into economic profit.

Discriminating among groups of buyers

The firm offers different prices to different types of buyers, based on things like age, employment status or some other easily distinguished characteristic.