Competitive, Monopolistic and Monopolistically Competitive Markets Flashcards
What are the key conditions and implications of perfect competition?
- Many buyers and many sellers all ‘small’ relative to the market
- Each firm produces a homogenous product
- Buyers and seller have perfect information
- No transaction costs
- Free entry and exit
- Implications
- A single market price is determined by the interaction of demand and supply
- Firms earn zero economic profits in the long run
What is the revenue-cost approach to short run profit maximisation for a perfectly competitive firm?
- Total revenue curve is a straight line because the firm is a price taker, and MR = P
- The firm should produce where P = MC, in the range where MC is increasing
What is the short run cost minimisation strategy for a perfectly competitive firm?
- If the price is above AVC at Q(MR = MC), the firms should continue producing even if running at a loss
- If the price is below AVC at Q(MR = MC), the firms should shut down to minimise losses
What is the SR supply curve for a perfectly competitive firm?
The portion of the MC curve above AVC
What is the LR equilibrium for a perfectly competitive firm?
- Ultimately zero profits will be reached
- Economies of scale are maximised as AVC is minimised
- Lerner Index = 0 b/c P = MC
What are the conditions and implications of monopoly markets?
- A single firm serves an entire market for a good that has no close substitutes
- Implication: Marked demand curve is the firm’s demand curve
- However a monopolist does not have unlimited market power
What are the sources of monopoly power?
- Economies of scale/scope
- Cost complementarity
- Patents/legal barriers
For a monopoly what is the elasticity - total revenue relationship?
- If we know the details of the demand curve:
- Firms can maximise revenue by producing where elasticity = -1
What is the output rule for a monopoly?
A profit maximising monopolist should produce the output such that MR = MC
What is the demand MR relationship for a firm with market power?
- Given a linear inverse demand function: P(Q) = a + bQ, where a > 0 and B
What is true of a monopolies profit and market power?
Profits depend on cost structure, so having market power does not imply profitability
What is the monopolies supply curve?
- A monopolists market power implies P > MR = MC
- The firm choose a price quantity combination to max profit, there is not supply curve
- Supply functions tell us how quantity demanded varies contingent on P. Firms with market power do not take P as given
What is the output rule for multiplant decisions?
- Where MR(Q) is the marginal revenue of producing a total of Q = Q1 + Q2 units of output,
- The profit maximising rule is to allocate output among the plants such that
- MR(Q) = MC1(Q1)
- MR(Q) = MC2(Q2)
- i.e. the MC in the two plants must be equalised, otherwise arbitrage opportunity exists, and the firm is better off shifting production
What is the situation for a zero profit monopolist?
ATC is tangent to demand
What is DWL?
- The consumer and producer surplus that is lost due to the monopolist charging a price in excess of MC
- Compare with perfect competition by using MC as a supply curve
