Perfect Competition
A market structure where there are many firms, unrestricted entry, homogeneous products, and firms are price takers.
Number of firms in Perfect Competition
Very many.
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Perfect Competition
A market structure where there are many firms, unrestricted entry, homogeneous products, and firms are price takers.
Number of firms in Perfect Competition
Very many.
Freedom of entry in Perfect Competition
Unrestricted.
Nature of product in Perfect Competition
Homogeneous (undifferentiated).
Examples of Perfect Competition
Cabbages, foreign exchange.
Implications for demand curve in Perfect Competition
Horizontal; firm is a price taker.
Monopoly
A market structure characterized by a single firm, restricted entry, and unique products.
Number of firms in Monopoly
One.
Freedom of entry in Monopoly
Restricted or completely blocked.
Nature of product in Monopoly
Unique.
Examples of Monopoly
Prescription drugs produced under patent, local water company.
Implications for demand curve in Monopoly
Downward sloping; firm has considerable control over price.
Price in Perfect Competition
Firms are price takers with infinitely elastic demand curves.
Short-Run Equilibrium of the Firm
Profit maximization occurs where Price equals Marginal Cost.
Possible outcomes for a firm in short-run equilibrium
Possible supernormal profits or short-run loss.
Short-Run Supply Curve of Firm
SRMC > AVC (Short-run marginal cost must be above average variable cost).
Long-Run Equilibrium of the Firm
All supernormal profits are competed away, with LRMC > AC.
Advantages of Perfect Competition
Allocative efficiency, productive efficiency, responsiveness to consumer wishes.
Disadvantages of Perfect Competition
Insufficient profits for investment, lack of product variety, limited competition over product design.
Barriers to Entry in Monopoly
Structural/natural and strategic barriers inhibit competition.
Natural Monopoly
Occurs when one firm can supply an entire market at a lower cost than multiple firms.
The Monopolist’s Demand Curve
Downward sloping with MR below AR.
Equilibrium Price and Output in Monopoly
Set where MC equals MR; price determined by the demand curve.
Limit Pricing
Incumbent firm sets a low price to deter new market entrants.
Disadvantages of Monopoly
High prices, low output, lack of innovation incentive, and X-inefficiency.
Advantages of Monopoly
Economies of scale, potential for high profits, ability to fund R&D.
Short-Run Industry Supply Curve in Perfect Competition
Horizontal aggregation of individual firm supply curves.
Long-Run Industry Supply Curve
May be increasing, constant, or decreasing cost industry.
Incompatibility of Economies of Scale
Economies of scale conflict with perfect competition principles.
X-inefficiency
Organizational slack leading to inefficiency in monopolized markets.
Consumer Sovereignty
Consumers dictate production through their preferences in a competitive market.
Advertising in Perfect Competition
There is no point in advertising due to product homogeneity.
Economic implications of a monopoly
Contrasts with perfect competition due to control over price and output.
Strategic barriers to entry
Tactics used by incumbents to deter new entrants.
Reasons for barriers to entry
Economies of scale, brand loyalty, legal restrictions, and aggressive tactics.
Marginal Revenue in Monopoly
Always less than Average Revenue due to downward sloping demand.