Perfect Competition

No. and Nature of Size of product firms sold Large Homogene number ous goods of small firms Large number of relatively small firms Differentiat ed Products

Entry and Information Exit condition Free entry Perfect and exit Information

Market power Price taker

Advertising

Maximum Profit P = MR = MC

Graph

Example of industries 1. Agricultural market 2. Free software 3. Streetfood vendors

1. Independently owned and operated highstreet stores and restaurants. 2. Producers of
toothpastes, toilet papers, computer software and operating systems.

No advertising

Monopolistic Competition

No barriers

Slightly Imperfect Information

Price setter

Use Max Profits advertising MR = MC to shift demand

Oligopoly

Monopoly

Small number of relatively large firms Single firm

Similar Products

High barriers

Slightly Imperfect Information

Uses Use Game advertising Theory to set Q or P Price setter Little advertising

Always Max Profit when MR = MC

1. 2. 3. 4. 5.

Steel industry Aluminum Film Cell phone Gas

Unique goods

Extreme Imperfect barriers to Information entry

Max Profits MR = MC

1. Local telephone service 2. Water service 3. Cable television 4. Electricity service

Pure competition - the theoretical free-market situation in which the following conditions are met: (1) buyers and sellers are too numerous and too small to have any degree of individual control over prices, (2) all buyers and sellers seek to maximize their profit (income), (3) buyers and seller can freely enter or leave the market, (4) all buyers and sellers have access to information regarding availability, prices, and quality of goods being traded, and (5) all goods of a particular nature are homogeneous, hence substitutable for one another. Also called perfect market or pure competition. Plurality - also called relative majority used in the context of voting, refers to the largest number of votes to be received by any candidate (or any proposal in a referendum) Free entry - there are no significant obstacles preventing firms from entering the industry. Mobility (Economic) - the ability of an individual or family to improve their income, and social status, an individual lifetime or between generations, usually measured in income. Profit maximization - a process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal. Breakeven graph - these are graphs which show how costs and revenues of a business change with a change in sales. They show the level of sales the business must make in order to break even. Total cost curve- a curve that graphically represents the relation between the total cost incurred by a firm in the short-run production of a good or service and the quantity produced. The total cost curve is a cornerstone upon which the analysis of short-run production is built. It combines all opportunity cost of production into a single curve, which can then be used with the total revenue curve to determine profit. There are a few features to note about the total cost curve:

The total cost curve is upward sloping (i.e. increasing in quantity). This simply reflects the fact that it costs more in total to produce more output. The total cost curve is generally bowed upwards. The intercept on the vertical axis represents the firm's fixed total fixed cost, since this is the cost of production even when output quantity is zero.

Economies of scale- goods can be produced at a lower cost per good, as the quantity produced increases. When economies of scale occur, the long-run average total cost (LRAC) curve will be declining. Profit maximization in pure competition- the firm's profit will be maximized at the level of output whereby the marginal (additional) revenue received from the last unit produced is just equal to the

marginal (additional) cost incurred by producing that last unit. Maximum profit for the firm occurs at the output level where MR = MC. Long run equilibrium- when the market price equates the quantity demanded to the total quantity supplied by the number of firms in the industry when each firm produces on its long-run supply curve. Consumer welfare- individual benefits derived from the consumption of goods and services. Monopolistic competition- a form of imperfect competition where many competing producers sell products that are differentiated from one another (that is, the products are substitutes, but, with differences such as branding, are not exactly alike). Monopolistically competitive markets have the following characteristics: 1.) There are many producers and many consumers in a given market, and no business has total control over the market price. 2.) Consumers perceive that there are non-price differences among the competitors' products. 3.) There are few barriers to entry and exit. 4.) Producers have a degree of control over price. Average revenue- the revenue received for selling a good per unit of output sold, found by dividing total revenue by the quantity of output. Marginal revenue- indicates how much extra revenue a firm receives for selling an extra unit of output. It is found by dividing the change in total revenue by the change in the quantity of output. Marginal revenue is the slope of the total revenue curve and is one of two revenue concepts derived from total revenue. Product differentiation- slight differences that exist between two or more goods that are essentially the same and which satisfy the same basic want or need. Product differentiation is usually achieved in one of three ways: (1) physical differences, (2) perceived differences, and (3) support services. Profit maximization in monopolistic competition- a monopolistically competitive is presumed to produce the quantity of output that maximizes economic profit--the difference between total revenue and total cost. This production decision can be analyzed directly with economic profit, by identifying the greatest difference between total revenue and total cost, or by the equality between marginal revenue and marginal cost. Competition among the few- a market with a small number of sellers (or buyers), such that each seller (or buyer) has some degree of market control. Monopoly - a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. Technical monopolies Regulated monopolies

Price discrimination- a pricing strategy that charges customers different prices for the same product or service. Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. Characteristics of oligopolies- (1) A few large producers. (2) Homogenous OR differentiated products. (3) Price maker, but still mutually interdependent. (4) Relatively high entry barriers. Kinked demand curve- a demand curve with two distinct segments with different elasticities that join to form a kink. The primary use of the kinked-demand curve is to explain price rigidity in oligopoly. The two segments are: (1) a relatively more elastic segment for price increases and (2) a relatively less elastic segment for price decreases. Truncated marginal curve Collusion- a usually secret agreement among competing firms (mostly oligopolistic firms) in an industry to control the market, raise the market price, and otherwise act like a monopoly. Collusive practices Price leadership- a method used by a group of firms in the same market (typically oligopoly firms) in which one firm takes the lead in setting or changing prices, with other firms then following behind. Cartel- a formal agreement between businesses in the same industry, usually on an international scale, to get market control, raise the market price, and otherwise act like a monopoly. A cartel tends to be unstable because the artificially high prices it sets gives each member of the cartel an incentive to "cheat" with a slightly lower price. Quasi-agreement