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Monopoly and Monopolistic

Monopoly and Monopolistic

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90 views42 pages

Monopoly and Monopolistic

Monopoly and Monopolistic

Uploaded by

Misbah437
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Market Structures

Market structures
The firm in competitive markets
Non-perfect competition

Perfect competition

Monopoly

Monopolistic competition

Oligopoly

The Four Types of Market Structure


Number of Firms? Many firms Type of Products?

One firm

Few firms

Differentiated products

Identical products

Monopoly
Tap water Cable TV

Oligopoly
Tennis balls Crude oil

Monopolistic Competition Novels Movies

Perfect Competition Wheat Milk

Copyright 2004 South-Western

Perfect Competition

WHAT IS A COMPETITIVE MARKET ?


A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market.

WHAT IS A COMPETITIVE MARKET?


As a result of its characteristics, the perfectly competitive market has the following outcomes: The actions of any single buyer or seller in the market 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 sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined by the market.

The Revenue of a Competitive Firm


Total revenue for a firm is the selling Total revenue price times the quantity sold. Average Revenue= Quantity TR = (P Q) Average revenue tells us how much Price Quantity revenue a firm receives for the typical unit sold. Quantity Average revenue is total revenue divided by the quantity sold. Price In perfect competition, average revenue equals the price of the good.

The Revenue of a Competitive Firm


Marginal revenue is the change in total revenue from an additional unit sold. MR =TR/ Q For competitive firms, marginal revenue equals the price of the good.

MR = TR = PQ = P = AR Q Q

Table 1 Total, Average, and Marginal Revenue for a Competitive Firm

Copyright2004 South-Western

Table 2 Profit Maximization: A Numerical Example

Copyright2004 South-Western

PROFIT MAXIMIZING CONDITION

MR = MC

Figure 1 Profit Maximization for a Competitive Firm

PROFIT MAXIMIZATION AND THE COMPETITIVE FIRMS SUPPLY CURVE

Profit maximization occurs at the quantity where marginal revenue equals marginal cost.

When MR > MC When MR < MC When MR = MC

increase Q decrease Q Profit is maximized

Figure 3 The Competitive Firms Short Run Supply Curve

Costs If P > ATC, the firm will continue to produce at a profit. Firms short-run supply curve MC

ATC If P > AVC, firm will continue to produce in the short run.

AVC

Firm shuts down if P < AVC 0

Quantity

Copyright 2004 South-Western

The Firms Short-Run Decision to Shut Down

The portion of the marginal-cost curve that lies above average variable cost is the competitive firms short-run supply curve.

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

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

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

Long Run Normal Profit Equilibrium With a horizontal market demand curve, MR=P. P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.

A Firm with Zero profit or Normal Profit

Monopoly

Monopoly
While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if . . .
it is the sole seller of its product. its product does not have close substitutes.

WHY MONOPOLIES ARISE


The fundamental cause of monopoly is barriers to entry. Barriers to entry have following sources:
The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number of producers.

Natural Monopolies
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. A natural monopoly arises when there are economies of scale over the relevant range of output.

A Monopolys Revenue

Total Revenue

P Q = TR

Average Revenue TR/Q = AR = P Marginal Revenue TR/Q = MR

Figure 2a Demand Curves for Competitive and Monopoly Firms

Figure 2b Demand Curves for Competitive and Monopoly Firms

Table 1 A Monopolys Total, Average, and Marginal Revenue

Copyright2004 South-Western

Figure 3 Demand and MarginalRevenue Curves for a Monopoly

Figure 4 Profit Maximization for a Monopoly

Figure 5 The Monopolists Profit

Monopolistic Competition

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 or identical product to the others. Markets that have some features of competition and some features of monopoly.

Monopolistic Competition
Attributes of Monopolistic Competition
Many sellers Product differentiation Free entry and exit

Monopolistic Competition
Many Sellers
There are many firms competing for the same group of customers.
Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc.

Monopolistic Competition
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 a downward-sloping demand curve.

Monopolistic Competition
Free Entry or Exit Firms can enter or exit the market without restriction. The number of firms in the market adjusts until economic profits are zero.

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.

Figure 1a Monopolistic Competitors in the Short Run

Figure 1b Monopolistic Competitors in the Short Run

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.

Figure 2 A Monopolistic Competitor in the Long Run


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

Figure 3 Monopolistic versus Perfect Competition

(a) Monopolistically Competitive Firm Price MC Price

(b) Perfectly Competitive Firm

ATC

MC

ATC

P P = MC P = MR (demand curve)

MR

Demand

Quantity produced

Efficient scale

Quantity

Quantity produced = Efficient scale

Quantity

Copyright2003 Southwestern/Thomson Learning

Table Monopolistic Competition: Between Perfect Competition and Monopoly

Copyright2004 South-Western

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