Involves a very large number of firms producing a

standardized product or identical products .

Characteristics:
1.Very large numbers
2. Standardized product
3. Price takers
4. Free entry and exit

Demand by a purely competitive seller:

Perfectly elastic demand

Slope of demand curve: Horizontal

Price and output
determination:
The firm represented cannot obtain a higher
price by restricting its output , nor does it
need to lower its price to increase its sales
volume.

Productive efficiency

Is achieved because free entry and exit force firms to

operate where ATC is at minimum. Product price is at the
lowest level consistent with minimum ATC.

The Allocative efficiency

Results because production occurs up to that
output at which price equals marginal cost.

Exists when a single firm is the sole producer of a

product for which there are no close substitutes.

Characteristics:
1.Single seller
2. No close substitutes
3. Price Maker
4. Blocked entry
5. Non price competition

Demand by a monopolist:
demand is elastic, a decline in price will increase total
revenue.
Slope of Monopolists demand curve : Downward

Price and Output

determination:
Monopolist has to lower the price and consider
producing goods in economies of scale (volume of
production) to increase revenue.
Monopolist produce where Marginal Revenue is
positive, it never produce at negative MR.

Barriers to entry:
1.Economies of scale
2. Legal barriers to entry:
Patents and Research
3. Ownership or control of
essential resources
4. Pricing and other
strategic barriers to entry.
Monopolist Demand curve is its market
demand curve:
Because the pure monopolist is the
industry.

Marginal revenue is less than the price (AR)

Where pure monopolist can
increase sales only by charging
lower price.
Why is it that monopolist sets price in the
elastic region of demand?

Output and Price determination:

Monopolist will produce up to the output at
which MR equal MC.
Another way is by comparing TR and TC

Misconceptions concerning Monopoly

Pricing:
1.Not highest price.
2. Total, not unit profit

The practice of selling a specific product at more

than one price when the price differences are not
justified by cost differences.
Price discrimination can take three forms:

1.Charging each customer in a single market the

maximum price she or he is willing to pay.
2. Charging each customer one price for the first set
of units
purchased and a lower price for subsequent
units.
3. Charging some customers one price and other

Conditions to price discrimination:

1.Monopoly power
2. Market
segregation
3.No resale

Characteristics:
1.A relatively large number of sellers
2. Differentiated products
3. Easy entry to, and exit from
Aspects of product differentiation:
1. Product attributes
2. Service
3. Location
4. Brand names and
packaging

Demand curve is highly , but not

perfectly elastic.
DC is not perfectly elastic because of two
reasons:
1.Monopolistic competitor has fewer
rivals.
2. Products are differentiated, so they
are not perfect substitutes.

The Short Run: Profit or Loss

Monopolistic competitors produce the level of
output at which marginal revenue equals marginal cost
(MR=MC) .
Earn economic profit
Long Run:
Firms can only earn normal profit or
break even profit

Market dominated by a few large

producers of a homogenous or
differentiated product.
Characteristics:
1.Homogenous or differentiated
product.
2. Control over price but mutual
interdependence
3. Entry barriers
4. Mergers

The study of how people behave in

strategic situations. Oligopolies are
mutually interdependent in their pricing
policies.
Players (oligopolists) must pattern their
actions according to the actions and
expected reactions of rivals.
Cooperation with rivals. A secret
agreement among producers
(oligopolists) concerning control
over price and output

Three oligopoly models:

1.The Kinked Demand
Curve
2.Collusive pricing
3. Price leadership