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Presetation On Perfectly Competittive Market vs Monopoly

Rafi Ahmed ( 11100100030) Fariha Kimia Nur

PERFECT COMPETITION
A market structure where 5 criteria are met

All firms sell an identical product


All firms are price taker All firms have a relatively small market share Buyers know the nature of the product being sold and the prices charged by each firm The industry is characterized by freedom of entry and exit.

BASIC STRUCTURAL CHARACTERISTICS

Infinite buyers and sellers

Zero entry and exit barriers


Perfect factor mobility Perfect information Zero transaction cost Profit maximization Homogeneous products Non-increasing returns to scale

PRODUCTION ALTERNATIVE

With profit maximization, price exceeds average total cost at the quantity that equates marginal revenue and marginal cost. In this case the firm generates an economic profit

PRODUCTION ALTERNATIVE

with loss minimization price is greater than average variable cost but is less than average total cost at the quantity that equate marginal revenue and marginal cost. In

this case, the firm incurs a smaller loss by producing some output than by not producing any out put
.

PRODUCTION ALTERNATIVE

A perfectly competitive firm is presumed to shutdown production and produce no output in the short run, if price is less than average variable cost.

Short run supply curve of perfect competition :


The short run supply curve for a perfectly competitive firm is the MC curve at and above the shutdown point. Portions of the marginal cost curve below the shut down point are not

part of the SR supply curve because the firm is not producing in that range.

Long run supply curve of perfect competition :


In the long run, a perfectly competitive firm adjusts plant size, or the quantity of capital, to maximize long-run profit. In addition, the entry and exit of firms into and out of a perfectly

Equilibrium in perfect competition :


equilibrium in perfect competition is that point where market demands will equal to market
supply. Firm's price will be determined at this point. In short run, equilibrium will be affected from demand. In long run, both demand and supply of product will affect the equilibrium in perfect competition and firms will receive only normal profit.

MONOPOLY
A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.

Characteristics of Monopoly :

Profit maximiser Price maker High barriers to entry

Single seller
Price discrimination

Types of monopoly :

Natural Monopoly

Government-granted Monopoly

SOURCES OF MONOPOLY POWER

Economic barriers :
Economies of scale Capital requirements Technological superiority No substitute Goods Control of natural resources Network externalities

Legal barriers :
Patents Copyrights

Deliberate actions
Collusion Lobbying government authorities

MONOPOLY PROFIT MAXIMIZING


Under normal market conditions for a monopolist, this price will be higher than the marginal cost of
producing the product, thereby indicating the price paid by the consumer, which is equal to the marginal benefit for the consumer, is above the firm's marginal cost. In the chart below the shaded area represents the profits of the monopolist. The lower half represents the normal profits that would go to a competitive firm (ignoring output losses). The upper half represent the additional economic profit going to the monopolist.

MONOPOLIST SHUT DOWN RULE


A monopolist should shut down when price is less than average variable cost for every output level. Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be less than average variable costs and the monopolists would be better off shutting down in the short term.

MONOPOLY VERSUS COMPETITIVE MARKETS

Marginal revenue :
In a perfectly competitive market price equals marginal revenue. In a monopolistic market marginal revenue is less than price.

Product differentiation :
In a perfectly competitive market every product is perfectly homogeneous and a perfect substitute for each other but there is no available substitute for a monopolized good.

Number of competitors :
Perfectly competitive market such as PC markets are populated by an infinite number of buyers and sellers but Monopoly involves a single seller.

Barriers to entry :
PC markets have free entry and exit. There are no barriers to entry, exit or competition but Monopolies have relatively high barriers to entry.

MONOPOLY VERSUS COMPETITIVE MARKETS

Elasticity of Demand :
A successful monopoly would have a relatively inelastic demand curve on the other hand a perfectly competitive firm has a perfectly elastic demand curve.

Excess Profits :
A perfectly competitive firm can make excess profits in the short term but excess profits attract competitors which can enter the market freely and decrease prices, eventually reducing excess profits to zero. A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.

Profit Maximization :
A perfectly market maximizes profits by producing such that price equals marginal costs. A monopoly maximizes profits by producing where marginal revenue equals marginal costs.

MONOPOLY VERSUS COMPETITIVE MARKET

P-Max, quantiity,price and profit :


If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase prices, reduce production, and realise positive economic profits.

Supply Curve :
In a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied.In a monopolistic market no such supply relationship exists.

Demand Curve :
The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company

QUESTIONS PLEASE !!!!!!

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