Pure Competition in the Short Run

Chapter 10

Market Models Overview

  • Four Market Models:

    • Pure Competition

    • Imperfect Competition

    • Monopolistic Competition

    • Oligopoly

    • Pure Monopoly

Characteristics of Market Models

  • Pure Competition:

    • Number of Firms: Very large

    • Product Type: Standardized

    • Control Over Price: None

    • Conditions of Entry: Very easy

    • Nonprice Competition: None

  • Monopolistic Competition:

    • Number of Firms: Many

    • Product Type: Differentiated

    • Control Over Price: Some

    • Conditions of Entry: Relatively easy

    • Nonprice Competition: Considerable

  • Oligopoly:

    • Number of Firms: Few

    • Product Type: Standardized or differentiated

    • Control Over Price: Limited, varies with collusion

    • Conditions of Entry: Significant obstacles

    • Nonprice Competition: High

  • Pure Monopoly:

    • Number of Firms: One

    • Product Type: Unique

    • Control Over Price: Considerable

    • Conditions of Entry: Blocked

    • Nonprice Competition: Mostly advertising

Characteristics of Pure Competition

  • Very large number of sellers

  • Standardized product

  • Firms are "Price takers"

  • Free entry and exit from the market

Demand and Revenue in Pure Competition

  • Demand: Perfectly elastic

    • Firms can produce any amount at market price

  • Revenue Formulas:

    • Average Revenue (AR): AR=TRQ=PAR = \frac{TR}{Q} = P

    • Total Revenue (TR): TR=P×QTR = P \times Q

    • Marginal Revenue (MR): MR=ΔTRΔQMR = \frac{\Delta TR}{\Delta Q}

Profit Maximization Strategies

  • TR – TC Approach:

    • Firms produce where TR exceeds TC maximally.

  • MR = MC Approach:

    • Condition for production: Price = MR = MC

    • Key decisions:

    1. Should the firm produce?

    2. At what amount?

    3. What profit/loss result?

Loss Minimization Scenario

  • Firms may still produce if $MR > ext{minimum AVC}$.

  • Losses minimized where $MR = MC$.

Output Determination in Short Run

  • Production Decisions:

    • Produce if price ≥ minimum average variable cost (AVC).

    • Quantity is optimized where MR=MCMR = MC.

  • Economic Profit:

    • Profit if price > average total cost (ATC).

    • Loss if ATC > price.

chapter 12

Introduction to Pure Monopoly

  • Single seller; sole producer with no close substitutes.

  • Price maker with control over pricing.

  • High barriers to entry prevent new competitors.

  • Non-price competition mainly through advertising.

Examples of Monopoly

  • Public utilities: natural gas, electric, cable television.

  • Near monopolies include Intel, Android, and professional sports teams.

Barriers to Entry

  • Economies of scale.

  • Legal barriers: patents and licenses.

  • Control of essential resources.

  • Strategic barriers including pricing strategies.

Monopoly Demand Overview

  • Monopolist's demand curve equals the market demand curve.

  • Downward sloping demand curve; marginal revenue is less than price.

Revenue and Cost Data of a Pure Monopolist

  • Key data points include quantity of output, price (average revenue), total revenue, marginal revenue, average total cost, and total cost.

Determining Price and Marginal Revenue

  • Monopolist sets price in the elastic region of the demand curve.

  • Marginal revenue consistently less than price.

Output and Price Determination Steps

  1. Identify profit-maximizing output where MR=MCMR = MC.

  2. Extend vertical line to find profit-maximizing price on the demand curve.

  3. Calculate economic profit through total revenue minus total cost or per unit profit.

Misconceptions of Monopoly Pricing

  • Not necessarily the highest price; total profit focus rather than unit profit.

  • Possibility of incurring losses.

Inefficiency of Pure Monopoly

  • Less efficient compared to perfectly competitive markets; leads to inefficiency losses.

Economic Effects of Monopoly

  • Income transfer, cost complications (economies of scale, simultaneous consumption, network effects, x-inefficiency, rent-seeking, and tech advances).

Assessment and Policy Options

  • Potential actions: break up firms (antitrust laws), regulate prices and quantities, or ignore the monopoly.

Price Discrimination

  • Charging different prices to different buyers not based on cost differences.

  • Success conditions: monopoly power, market segregation, no resale.

Examples of Price Discrimination

  • Applied in business travel, movie theaters, golf courses, railroads, coupons, and in international trade.

chapter 13

Monopolistic Competition

  • Characteristics:

    • Large number of sellers

    • Product differentiation

    • Easy entry and exit

    • Nonprice competition (e.g., advertising)

Industry Concentration

  • Measures of Concentration:

    • 4-Firm Concentration Ratio (CR): Percentage of sales by the four largest firms.
      CR=Output of Four Largest FirmsTotal Output in the IndustryCR = \frac{Output\ of\ Four\ Largest\ Firms}{Total\ Output\ in\ the\ Industry}

    • Herfindahl Index (HI): Sum of squared market shares.
      HI=(HI = (%S<em>1)^2 + (%S</em>2)^2 + … + (%S_n)^2

Price and Output in Monopolistic Competition

  • Demand is highly elastic.

  • Short-Run Profit or Loss: Produce where MR=MCMR = MC.

  • Long-Run Profit: Only a normal profit due to entry and exit.

Monopolistic Competition and Efficiency

  • Monopolistic competition is inefficient:

    • Condition for productive inefficiency: P > min\ ATC

    • Condition for allocative inefficiency: P > MC

    • Leads to excess capacity.

Product Variety

  • Firms manage price, product, and advertising for better:

    • Product differentiation

    • Advertising

  • Consumer benefits from greater choices and better products:

    • Variety in types and styles

    • Different brands and quality

Impacts of Higher Wages

  • Higher minimum wage affects big chains differently:

    • Large chains (capital-intensive) are less impacted.

    • Small, labor-intensive restaurants may struggle or fail.