3.4.2 Perfect competition & 3.4.3 Monopolistic competition

Different types of markets

Characteristics of perfect competition (perfect competition is the idealised market model to compare but impossible to happen in real life lol)

• homogenous product (all firms produce the same product)

• equal access to FOP for all firms

• Many buyers & sellers

• All sellers are independent (no collution - when 2/more firms decide to help each other - ie. to reduce price of product at the same time)

• costless for entering/exiting market

• Perfect knowledge (everyone knows everything equally about the market)

• Profit maximisation is default objective for all firms (the only objective, no other reason to sell products - ie. just for fun)

Profit maximizing equilibrium in the short run & long run

Characteristics of monopolistically competitive markets

• firms have some price-making power facing a down-ward sloping demand curve

• Profit maximisation is the default objective (for all types of markets): MC = MR

• Goods sold can be differentiated

Profit maximizing equilibrium in the short run & long run + diagrammatic analysis

• There is supernormal profit in both short run & long run