Perfect Competition and Monopoly

theory of perfect competition

1. many sellers and many buyers, none of which is large in relation total sales or purchases

2. each firm produces and sells a homogenous product

3. buyers and sellers have all relevant information about prices, product quality, sources of supply, and so forth

4. firms have easy entry and exit

price taker

a seller that doesn’t have the ability to control the price of the product it sells

takes the price determined in the market

equilibrium price

established at the intersection of the market demand and market supply curves

only relevant price for the perfectly competitive firm

marginal revenue

the change in total revenue that results from selling one additional unit of output

profit maximization rule

says that a firm produces quantity of output at which MR=MC2

P=MR=MC

for a perfectly competitive firm, the profit maximization rule can be written as

theory of monopoly

• one seller

• single seller sells a product that has no close substitute

• barriers to entry are extremely high

government monopoly or market monopoly

monopolies can exist as …

• public franchise

• patents

• government licenses

legal barriers to entry in monopoly

public franchise

a right that government grants to a firm and that permits the firm to provide a particular good or service and excludes all others from doing so

patents

shielded from competitors; no one else can legally produce and sell the patented product or process

government licenses

required for entry into some industries & occupations

natural monopoly

economies of scale are so pronounced that only one firm can survive in the industry

price searcher

can raise its price and still sell its product, although it will not sell as many units as at the lower price

gains are greater than losses for a monopolist ___ > ___

P, MR