Difference between Perfect and Monopoly Market: Market Structure

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Perfect Competition

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A market structure where there are many firms, unrestricted entry, homogeneous products, and firms are price takers.

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Number of firms in Perfect Competition

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Very many.

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36 Terms

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Perfect Competition

A market structure where there are many firms, unrestricted entry, homogeneous products, and firms are price takers.

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Number of firms in Perfect Competition

Very many.

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Freedom of entry in Perfect Competition

Unrestricted.

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Nature of product in Perfect Competition

Homogeneous (undifferentiated).

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Examples of Perfect Competition

Cabbages, foreign exchange.

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Implications for demand curve in Perfect Competition

Horizontal; firm is a price taker.

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Monopoly

A market structure characterized by a single firm, restricted entry, and unique products.

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Number of firms in Monopoly

One.

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Freedom of entry in Monopoly

Restricted or completely blocked.

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Nature of product in Monopoly

Unique.

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Examples of Monopoly

Prescription drugs produced under patent, local water company.

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Implications for demand curve in Monopoly

Downward sloping; firm has considerable control over price.

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Price in Perfect Competition

Firms are price takers with infinitely elastic demand curves.

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Short-Run Equilibrium of the Firm

Profit maximization occurs where Price equals Marginal Cost.

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Possible outcomes for a firm in short-run equilibrium

Possible supernormal profits or short-run loss.

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Short-Run Supply Curve of Firm

SRMC > AVC (Short-run marginal cost must be above average variable cost).

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Long-Run Equilibrium of the Firm

All supernormal profits are competed away, with LRMC > AC.

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Advantages of Perfect Competition

Allocative efficiency, productive efficiency, responsiveness to consumer wishes.

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Disadvantages of Perfect Competition

Insufficient profits for investment, lack of product variety, limited competition over product design.

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Barriers to Entry in Monopoly

Structural/natural and strategic barriers inhibit competition.

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Natural Monopoly

Occurs when one firm can supply an entire market at a lower cost than multiple firms.

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The Monopolist’s Demand Curve

Downward sloping with MR below AR.

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Equilibrium Price and Output in Monopoly

Set where MC equals MR; price determined by the demand curve.

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Limit Pricing

Incumbent firm sets a low price to deter new market entrants.

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Disadvantages of Monopoly

High prices, low output, lack of innovation incentive, and X-inefficiency.

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Advantages of Monopoly

Economies of scale, potential for high profits, ability to fund R&D.

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Short-Run Industry Supply Curve in Perfect Competition

Horizontal aggregation of individual firm supply curves.

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Long-Run Industry Supply Curve

May be increasing, constant, or decreasing cost industry.

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Incompatibility of Economies of Scale

Economies of scale conflict with perfect competition principles.

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X-inefficiency

Organizational slack leading to inefficiency in monopolized markets.

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Consumer Sovereignty

Consumers dictate production through their preferences in a competitive market.

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Advertising in Perfect Competition

There is no point in advertising due to product homogeneity.

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Economic implications of a monopoly

Contrasts with perfect competition due to control over price and output.

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Strategic barriers to entry

Tactics used by incumbents to deter new entrants.

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Reasons for barriers to entry

Economies of scale, brand loyalty, legal restrictions, and aggressive tactics.

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Marginal Revenue in Monopoly

Always less than Average Revenue due to downward sloping demand.