Chapter 9: Imperfect Competition and Monopoly Perfect Competition

Idealized market of atomistic firms who are price-takers

Major kinds of imperfect competition

Monopoly Oligopoly Monopolistic competition

*Prices are higher and outputs are lower under imperfect competition Imperfect Competition

Prevails in an industry whenever individual sellers have some

measure of control over the price of their output

If a firm can appreciably affect the market price of its output

*Imperfect competitor has some but not complete discretion over its prices Under Perfect Competition horizontal demand curve o indicating it can sell all it wants at going market price demand is perfectly elastic

Under Imperfect Competition downward-sloping demand curve o if a firm increases its sales, it will definitely depress the market price of its output as it moves down its dd demand curve. emand is finite elasticity

MONOPOLY

! single seller with complete control over an industry

 It is the only firm producing in its industry and there is no

industry producing a close substitute regulation or protection *In the long run, no monopoly is completely secure from attack by competitor OLIGOPOLY o "ach individual firm can affect the market price. o #few sellers$% price wars

Most monopolies persist because of some form of government

MONOPOLI !IC COMP"!I!ION

&hen a large number of sellers produce differentiated products. Products sold by different firms are not identical
Differentiated products ones whose important characteristics vary. #hole price of a $ood

Includes not 'ust its dollar price but also the opportunity cost of
search, travel time and other non-dollar cost. See page 169 OU%C" O& M'%("! IMP"%&"C!ION

Industries tend to have fewer sellers when there are significant economies of large-scale production and decreasing cost Markets tend toward imperfect competition when there are #barriers to entry$ that make it difficult for new competitors to enter an industry o (arriers may arise from government laws and regulations o "conomic factors

If there are economies of scale, a firm can decrease its average costs by expanding its output, at least up to a point That means bigger firms will have cost advantage over smaller

firms. See page 171 Nat)ral Monopoly

! market in which the industry)s output can be efficiently

produced only by a single firm.

*his occurs when the technology e+hibits economies of sale over

a range of output that is as large as the entire demand

#network industries$
*'%%I"% !O "N!%Y ,egal -estrictions o Patents, entry restrictions and foreign-trade tariffs and .uotas. /igh 0ost of "ntry !dvertising and Product ifferentiation

!otal %e+en)e , P - . '+era$e %e+en)e , price per )nit / !%01

Mar$inal %e+en)e

Is the change in revenue that is generated by an additional unit

of sales. 0an either be positive or negative.

0alculated by subtracting the total revenues of ad'acent outputs 1egative M- means that in order to sell additional units, the firm
must decrease its price on earlier units so much that its total revenues decline. ote! "ven though #$ is negative, %verage $evenue or Price is still Positive. P 2 '% 2 M% , P 3 Lost re+en)e on all pre+io)s 1 #arginal $evenue is positive when demand is elastic, &ero when demand is unit'elastic, and negative when demand is

inelastic. Demand is elastic when a price decrease leads to a revenue increase !O!'L P%O&I! , !O!'L %"4"NU" 3 !O!'L CO ! , 5P - 16 3 !C #aximum Profit will occur when output is at that level where the firm(s marginal revenue is e)ual to its marginal cost.* +hen #$ , #Perfect Competition 2. *he sale of e+tra units will never depress price and the lost revenue on all previous . is therefore e.ual to zero. a. Price 3 !verage -evenue 3 Marginal -evenue 4. M- 3 P 3 M0 at the ma+imum-profit level of output Mar$inal Principle People will ma+imize their incomes or profits or satisfactions by counting only the marginal costs and marginal benefits of a decision. $ead .ummary