Isues in economics today 6th by guell chapter05

Chapter 05Perfect Competition, Monopoly, and Economic versus... Characteristics of Perfect Competition • a large number of competitors, such that no one firm can influence the price •

Chapter 05

Perfect Competition, Monopoly,

and Economic versus

From Perfect Competition to

Picking the Quantity to

Maximize Profit The Perfectly

Competitive Case

AVC

MR P*

P

Picking the Quantity to Maximize

Profit The Monopoly Case

Characteristics of Perfect

Competition

• a large number of competitors, such that

no one firm can influence the price

• the good a firm sells is indistinguishable

from the ones its competitors sell

• firms have good sales and cost forecasts

• there is no legal or economic barrier to its entry into or exit from the market

• The sole seller of a good or service.

• Some monopolies are generated

because of legal rights (patents

Monopolistic Competition

situation in a market where there are

many firms producing similar but not

identical goods

• Example : the fast-food industry

McDonald’s has a monopoly on the

“Happy Meal” but has much

competition in the market to feed kids

burgers and fries.

Which Model Fits Reality?

• Perfect competition is rare outside

agriculture though it fits some labor markets.

• Monopolies are common in utilities.

• Major branded companies are

typically either in oligopolistic or

monopolistically competitive

Examples of Different Market

Distance Service

1) Cars and

Trucks 2) Soft

Drinks

1) Windows

Operating system

2) Local

Residentia

l electric

Distinguishing Characteristics

Between Market Forms

Perfect Competition Monop olistic

Compe tition

Oligopoly Monopoly

Number

of Firms

Many-often thousands or even millions

Product Identical Similar Similar or N/A

Concentration Ratios

separates oligopoly from

Concentration Ratios For Various

Manufacturing Industries

4 Largest Firms 8 Largest Firms 50 Largest Firms Breakfast

Supply Under Perfect

Competition

Normal vs Economic Profit

• Normal Profit : the level of

profit that business owners

could get in their next best

alternative investment

• Economic Profit: any profit

above normal profit

Return on Equity For Various

Industries

Return

Net Liabilities)

Manufacturing 21.8%

Transportation and 8.2%

When and Why Economic Profits

Go to Zero

Time Horizons

• Short Run: the period of time

where we cannot change

things like plant and

equipment

• Long Run: the period of time

where we can change things

Market Forms and Economic

Profits

• Under perfect competition or

monopolistic competition, economic

profits go to zero because of the entry

of new firms increases market supply

and lowers prices.

• Economic profits are under no

pressure to shrink under oligopoly or

monopoly because entry doesn’t occur

so prices do not fall.

Figure 2 The Pressures on Price in

Perfect Competition

$

MC

ATC AVC

MR3

MR2

MR4

Long Run Pressure Short Run Pressure

Figure 3 Points of Production in Perfect

Competition

$

MC

ATC AVC

MR4

MR3

MR2

MR1

Figure 4 Supply in Perfect

Competition

$

MC

ATC AVC Supply