PerfectPerfectCompetitionCompetition

vs.vs.MonopolyMonopoly

Microeconomics – Dr. D. Foster

How are they the same?How are they the same?• Profit maximizing.Profit maximizing.

• Same rule for profitSame rule for profit maximizing. maximizing.

• Cost structures.Cost structures.

• Calculate their economic profit as Calculate their economic profit as TR-TC.TR-TC.

How are they different?

• Only 1 firm.Only 1 firm.• Entry barriers.Entry barriers.• Mkt D = firm demandMkt D = firm demand• May earn LR econ May earn LR econ

profits.profits.• Allocatively inefficientAllocatively inefficient• Likely prod. inefficientLikely prod. inefficient

• Many firms.Many firms.• No entry barriers.No entry barriers.• Mkt D Mkt D firm firm

demanddemand• Cannot earn LR econ Cannot earn LR econ

profits.profits.• Allocatively efficientAllocatively efficient• LR – prod. efficientLR – prod. efficient

Perfect Perfect CompetitionCompetition

MonopolyMonopoly

Perfect Perfect CompetitionCompetition

QQe

Pe

PS

D

The Market A Firm

$

MR = d

q

Pe

MC

q*

ATCS*

MR* = d*Pe*

q*

The market determines the equilibrium price.

For the firm, price = demand = MR.

For the firm, find ATC to determine profit.

With a positive economic profit, firms enter.

Market supply increases and the market price falls.

LR equilibrium – firm earns 0 economic profit; is allocatively and productively efficient.

MonopolyMonopoly

Q*Quantity

Price

Demand

MR

MC

P* ATC

The firm = the market

The firm must find MR.

Find MC to determine Q*.

Price off the demand.

Find ATC to determine the firm’s economic profit.

Without entry, this persists in the long run.

In LR – firm is allocatively and productively inefficient.

PerfectPerfectCompetitionCompetition

vs.vs.MonopolyMonopoly

Microeconomics – Dr. D. Foster