monopoly and monopolistic

7/29/2019 Monopoly and Monopolistic

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MarketStructures


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Marketstructures

Perfect competition

Oligopoly

The firm in competitive markets

Monopoly

Non-perfect competition

Monopolistic competition


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The Four Types of Market Structure

Copyright 2004 South-Western

Tap water

Cable TV

Monopoly

Novels

Movies

Monopolistic

Competition

Tennis balls

Crude oil

Oligopoly

Number of Firms?

Perfect

Wheat

Milk

Competition

Type of Products?

Identical

products

Differentiated

products

One

firm

Few

firms

Many

firms


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Perfect Competition


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A perfectly competitive market has thefollowing characteristics:

There are many buyers and sellers in themarket.

The goods offered by the various sellers

are largely the same.

Firms can freely enter or exit the

market.

WHAT IS A COMPETITIVE MARKET ?


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As a result of its characteristics, the perfectly

competitive market has the following outcomes:

The actions of any single buyer or seller in themarket have a negligible impact on the market

price. Each buyer and seller takes the market price as

given.

A competitive market has many buyers and sellerstrading identical products so that each buyer and selleris a price taker.

Buyers and sellers must accept the price

determined by the market.

WHAT IS A COMPETITIVE MARKET?


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Total revenue for a firm is the sellingprice times the quantity sold.

TR = (P Q)

Average revenue tells us how muchrevenue a firm receives for the typicalunit sold.

Average revenue is total revenuedivided by the quantity sold.

In perfect competition,average revenueequals the price of the good.

The Revenue of a Competitive FirmAverage Revenue =

Total revenue

Quantity

Price Quantity

Quantity

Price


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Marginal revenue is the change in totalrevenue from an additional unit sold.

MR =TR/ Q

For competitive firms, marginal revenueequals the price of the good.

MR = TR = PQ = P = AR

Q Q

The Revenue of a Competitive Firm


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Table 1 Total, Average, and Marginal Revenue fora Competitive Firm

Copyright2004 South-Western


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Table 2 Profit Maximization: A Numerical Example



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PROFIT MAXIMIZING

CONDITION

MR = MC


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Figure 1 Profit Maximization for aCompetitive Firm


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PROFIT MAXIMIZATION AND THE

COMPETITIVE FIRMS SUPPLY CURVE

Profit maximization occurs at the quantity where

marginal revenue equals marginal cost.

When MR > MC increase Q

When MR < MC decrease Q

When MR = MC Profit is maximized


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Figure 3 The Competitive Firms Short Run Supply Curve

Copyright 2004 South-Western

MC

Quantity

ATC

AVC

0

Costs

Firm

shuts

down if

P AVC, firm will

continue to produce

in the short run.

IfP> ATC, the firm

will continue to

produce at a profit.


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The Firms Short-Run Decision to Shut Down

The portion of the marginal-costcurve that lies above averagevariable cost is the competitive

firms short-run supply curve.


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Figure 5a Profit as the Area betweenPrice and Average Total Cost


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Figure 5b Profit as the Area betweenPrice and Average Total Cost


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Long Run Normal ProfitEquilibrium

With a horizontal marketdemand curve, MR=P.

P=MR=MC=ATC.

There are no economicprofits.

All firms earn a normal rate

of return.

Figure 5c Profit as the Area between Price and Average Total Cost

A Firm with Zero profitor Normal Profit


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Monopoly


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Monopoly

While a competitive firm is a price

taker, a monopoly firm is a price maker.

A firm is considered a monopolyif . . .

it is the sole seller of its product.

its product does not have closesubstitutes.


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WHY MONOPOLIES ARISE Barriers to entry have following sources:

The government gives a single firm the exclusive right toproduce some good.

Costs of production make a single producer moreefficient than a large number of producers.

The fundamental cause of monopoly is barriers to entry.


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Natural Monopolies An industry is a natural monopoly when a single firm

can supply a good or service to an entire market at asmaller cost than could two or more firms.

A natural monopoly arises when there are economies

of scale over the relevant range of output.


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A Monopolys Revenue Total Revenue P Q = TR

Average Revenue TR/Q = AR = P

Marginal Revenue TR/Q = MR


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Figure 2a Demand Curves forCompetitive and Monopoly Firms


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Figure 2b Demand Curves forCompetitive and Monopoly Firms

Table 1 A Monopolys Total Average


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Table 1 A Monopolys Total, Average,and Marginal Revenue



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Figure 3 Demand and Marginal-Revenue Curves for a Monopoly


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Figure 4 Profit Maximization for aMonopoly


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Figure 5 The Monopolists Profit


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Monopolistic

Competition


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Monopolistic Competition

Types of Imperfectly Competitive Markets Monopolistic Competition

Many firms selling products that are similar but

not identical. Oligopoly

Only a few sellers, each offering a similar oridentical product to the others.

Markets that have some features of competitionand some features of monopoly.


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Attributes of Monopolistic Competition Many sellers

Product differentiation

Free entry and exit


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Many Sellers There are many firms competing for the same group of

customers.

Product examples include books, CDs, movies, computergames, restaurants, piano lessons, cookies, furniture, etc.


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Product Differentiation Each firm produces a product that is at least slightly

different from those of other firms.

Rather than being a price taker, each firm faces adownward-sloping demand curve.


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Free Entry or Exit Firms can enter or exit the market without restriction.

The number of firms in the market adjusts untileconomic profits are zero.


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COMPETITION WITH

DIFFERENTIATED PRODUCTS The Monopolistically Competitive Firm in the Short

Run Short-run economic profits encourage new firms to

enter the market. This:

Increases the number of products offered.

Reduces demand faced by firms already in the market.

Incumbent firms demand curves shift to the left.

Demand for the incumbent firms products fall, and their

profits decline.


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Figure 1a Monopolistic Competitorsin the Short Run


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Figure 1b Monopolistic Competitorsin the Short Run


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COMPETITION WITH

DIFFERENTIATED PRODUCTS The Monopolistically Competitive Firm in the Short

Run Short-run economic losses encourage firms to exit the

market. This:

Decreases the number of products offered.

Increases demand faced by the remaining firms.

Shifts the remaining firms demand curves to the right.

Increases the remaining firms profits.


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Figure 2 A Monopolistic Competitorin the Long Run

Firms will enter and exit until the firms aremaking exactly zero economic profits.

Figure 3 Monopolistic versus Perfect Competition


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Figure 3 Monopolistic versus Perfect Competition

Copyright2003 Southwestern/Thomson Learning

Quantity0

Price

Demand

(a) Monopolistically Competitive Firm

Quantity0

Price

P= MC P= MR(demand

curve)

(b) Perfectly Competitive Firm

MCATC

MCATC

MR

Efficientscale

P

Quantityproduced

Quantity produced =Efficient scale

Table Monopolistic Competition: Between


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Table Monopolistic Competition: BetweenPerfect Competition and Monopoly

monopoly and monopolistic

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