Pure Competition

Number of firms in a purely competitive market

A large number

Number of firms in a monopolistic competitive market

Many

Number of firms in a Oligiopoly

Few

Number of firms in a pure monopoly

One

Type of product in a purely competitive firm

Standardized

Type of product in a monopolistic competitive firm

Differentiated

Type of product in a oligiopoly

Standardized or differentiated

Type of product in a pure monopoly

Unique, no close substitutes

Control over price in a purely competitive firm

None

Control over price in a monopolistic competitive firm

Some within narrow limits

Control over price in a oligopoly

Limited by mutual interdependence

Control over price in a pure monopoly

Considerable

Conditions of entry in a purely competitive firm

Very easy

Conditions of entry in a monopolistic competitive firm

Relatively easy

Conditions of entry in a oligopoly

Significant obstacles

Conditions of entry in a pure monopoly

Blocked

Nonprice competition in a purely competitive firm

None

Nonprice competition in a monopolistic competitive firm

Considerable emphasis on advertising, brand names, and trademarks

Nonprice competition in a oligopoly

Typically a great deal for with product differentiation

Nonprice competition in a pure monopoly

Mostly public relations advertising

Examples of purely competitive markets

Agriculture, fish products, foreign exchange, basic metals, stock shares

Examples of monopolistic competition

Retail trade, dresses, shoes

Examples of oligopoly

Steel, automobiles, farm implements, household appliances

Examples of pure monopolies

Local utilities, oil

Demand for a perfectly competitive firm

Perfectly elastic

What does the demand schedule look like for a perfectly competitive firm?

P = D = MR = AR

**Average revenue**

AR = TR/Q = P

Total Revenue

TR = P X Q

Marginal Revenue

MR = change in TR/ change in Q

Profit maximization: TR-TC approach

Profit is maximized where the difference between total revenue and total cost is the greatest

**Profit Maximization: MR-MC approach**

Profits are maximized and losses are minimized when marginal revenue is equal to marginal cost

Economic profits

quantity\*(price - average total cost)

When does a firm stop producing?

When price is less than the minimum average variable cost

When are profits lost?

When P

When are profits made?

When P>ATC

Should this firm produce?

Yes, if price is equal to, or greater than, minimum average variable cost

What quantity should this firm produce?

Produce where MR (=P) = MC; there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized

Will production result in economic profit?

Yes, if price exceeds average total cost (TR will exceed TC), no, if average total cost exceeds price (TC will exceed TR)

Allocative efficiency

When the firm produces the socially optimal output at p = mc

Productive efficiency

At the lowest possible cost where p = minimum atc

What happens when price is equal to the minimum AVC?

It will cover the entire variable cost, and its loss is equal to the total fixed cost

When does a firm experience minimized losses?

When AVC

Firm’s supply curve

Is equal to the marginal cost curve when AVC is greater than or equal to price

Short run industry supply curve

Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms

What does economic profit do to the industry?

Causes more firms to enter, shifting the short run industry supply curve outward causing the market price to fall and output to rise. Each firm’s output reduces and economic profit eventually becomes zero

Long run market equilibrium

When the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

What does a horizontal long run industry supply curve show?

The firm will produce any quantity at the breakeven price

Constant cost industry

Firms’ cost curves are unaffected by changes in industry size, and the long-run industry supply curve is horizontal (perfectly elastic)

Increasing cost industry

Firms production costs rise with the size of the industry, and the long run industry supply curve is upward‐sloping

What happens to ATC as firms enter the industry?

The prices of resources rise and ATC rises

Decreasing cost industry

Firms production costs fall as the industry grows; the long run supply curve is downward sloping

What is the relationship between long run and short run supply curves?

The long run supply curve is always flatter as price elasticity is higher

Why long run equilibrium is efficient under perfect competition

1. firms supply the quantity at P = MC
2. with free entry and exit, each firm earns zero economic profit in the long run


1. Consumers willing to pay an amount equal MC so no mutually beneficial transactions go unexploited

What can occur in the long run?

Firms can expand or contract capacity or enter or exit the industry

**Triple equality**

**P= MC= minimum ATC where consumer surplus** and **producer surplus** are maximized

What are the limitations of triple equality?

Cannot occur in decreasing cost industries

Purely competitive markets will automatically adjust to:

Changes in consumer tastes, resource supplies, and technology

Why do constant-cost industries occur?

The demand for resources is small in relation to the total demand of those resources

What firms will leave in the long run?

Less skillfully managed firms, less productive labor forces, high transport costs

Purely competitive markets will automatically adjust to:

Changes in consumer taste, resource supplies, technology

What do economic profits cause?

**Supply increases, and price decreases until zero economic profits exist for firms**

What do economic losses cause?

**Supply decreases, and price increases until zero economic profits exist for firms**

How would entrepreneurs increase economic profits beyond normal profits?

by decreasing costs by innovating or having new product development

**Creative destruction**

Creation of new products and methods may destroy the old products and methods

Patent Failures

Patents give the inventor exclusive rights to market and sell their product for 20 years, though they may hinder “creative destruction”. It eliminates patents on complicated, hard to copy products and speed up innovation by increasing the opportunities of potential new competitors