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PERFECT COMPETITION
A market structure where 5 criteria are met
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.
part of the SR supply curve because the firm is not producing in that range.
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 :
Single seller
Price discrimination
Types of monopoly :
Natural Monopoly
Government-granted Monopoly
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
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.
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.
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