W5: market structures

Perfect competition

many sellers, free entry and exit, products are identical from one seller to another, and sellers are price takers. flat firm demand curve

Monopolistic competition

similar products , many sellers, each firm has monopoly over product it makes product differentiation important , free entry& exit . firms set prices ( to maximize profit) Quantity demanded determines price on the Demand curve

Oligopoly:

few sellers, similar/identical products Interdependence important – actions (mostly price-related) of one player impact all the others, High barriers to entry and exit

price setting in oligopoly

cant act alone, if price changes, competitions will do the same

monopoly

single seller, price maker, profit greater than MR,MC,ATC. Marginal revenue curve downward-sloping at half the angle of Demand curve, hard to enter

natural monopoly

occurs when a single company can produce and offer to sell a product or service at a lower cost than its competitors can, ex 1 well in town

perfect competitetion curve

long run curve may slope upward -production costs increase as output rises (an increasing-cost industry,

total revenue

P ∙ Q

total cost

ATC ∙ Q

profit

TR – TC = (P – ATC) ∙ Q

monopolistic competetion in long run

P > MR (like monopoly)

P > MC (like monopoly)

P = ATC (like perf. comp.)

Profit maximizing rule

MR= MC ( produce when marginal revenue = marginal cost)

Shut down rule

only rule that trumps profit maximizing , if price falls below AVC, you should shut down