Flashcards in Market Structure Deck (8):
Most important aspect of market
Extent to which competition exists
4 assumptions as to market structure
1) Perfect Competition
2) Perfect Monopoly
3) Monopolistic Competition
Short-run perfect competition, when will firm maximize profit?
When TR exceeds TC by greatest amount; marginal revenue is = to marginal cost.
Amount received (revenue) from last unit sold equals the incremental (marginal) cost of producing that unit. Marginal revenue = market price
Units after MC=MR would cost more to produce than what they can sell for
Long-run perfect competition
In a perfectly competitive market there are no long-run economic profits. MR, MC = LAC. Demand, price, and marginal revenue are the same
Perfect monopoly - natural monopoly?
A natural monopoly results from a condition where there are increasing returns to scale, such that a single firm can produce at a lower cost than 2 or more firms
Monopolistic firm demand curve
Neg slope; in order to sell more of its commodity, it must reduce its selling prices.
MR steeper slope than demand; MR must be below demand curve,; unit from each additional unit must be less than previous unit.
Produce where MR = MC.
When MC > MR you lose money
Monopolistic competition characteristics
Large number of sellers
Firms sell differentiated products that are similar but not identical - close substitute
Market entry and exit easy
Like perfect monopoly downward demand curve and more downward MR. MR is below demand curve because in order to be sloping down each additional unit must be decreasing. Lower MR is pulling down demand curve.
Long-run firms enter the market and thus less demand. If firms have losses they leave the market and thus more demand. Will reach equilibrium to break-even; no LR excess profits