PERFECT & IMPERFECT COMPETITION - Coggle Diagram
PERFECT & IMPERFECT COMPETITION
Four Basic Models of Market Structure
pure/ perfect competition
large number of firms, standardized product, no control over price, very easy entry.
provides a standard or norm for evaluating the efficiency of real-world economy
offer only negligible fraction of total market supply, i.e. can only be a price taker.
Perfectly elastic demand. The demand curve is horizontal.
In pure competition MR= P
Total Revenue is found by Price * Quantity. TR is a straight line that slopes upward to the right.
Marginal Revenue is the change in total revenue from selling one more unit.
one firm, unique product, considerable control over price, blocked entry.
few firms, standardized or differentiated, limited mutual interdependence, collusion, significant obstacles to entry, typically a great deal of non price competition.
many firms, differentiated product, some control over price, relatively easy entry, non price competition.
easy entry & exit
brand names & packaging
some control over price
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Four-firm concentration ratio
expressed as a percentage, id the ratio of the output of the 4 largest firms in an industry relative to total industry sales. Very low in purely competitive firms and high in oligopoly and pure monopoly.
is the sum of the squared percentage market shares of all firms in the industry. For a purely competitive industry, the index would approach zero because each firm's market share is extremely small. The lower the index the greater is the likelihood that an industry is monopolistically competitive rather than oligopolistic.
is highly but not perfectly elastic. The demand is more elastic than the demand faced by a pure monopolist because of competition.
2 ways to determine the level of output at which a competitive firm will realize maximum profit or minimum loss:
To compare TR & TC
Should we produce this product?
If so, in what amount?
What economic profit or loss will we realize?
When TR= TC, TR covers all costs including a normal profit but no economic profit = break even point.
To compare MR & MC
MR= MC Rule
If MR</= AVC the firm will shut down.
If MR> MC firms should produce.
The rule for profit maximization applies for all firms.
When pure competitive, P= MC. When producing is preferable to shutting down, the competitive firm should produce at the point where P=MC.
The MR= MC output level enables the purely product competitive firm to maximize profits or to minimize losses. P > ATC so the firm realizes an economic profit P-A per unit.
Loss Maximizing Case
At very early stages of production, marginal is low making marginal cost unusually high. If P> minimum AVC but P < ATC, the MR= MC output will permit the firm to minimize its losses.
If P < minimum AVC the firm will minimize its losses in the short run by shutting down. There is no level of output at which the firm can produce and incur a loss smaller than its fixed cost.
Short Run Supply Curve
Quantity supplied will be zero below the minimum AVC. The portion of the firm's MC curve lying above its AVC is its short run supply curve.
MR curve and Demand curve
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Short Run: Profit or Loss
Same strategy as pure competitors and monopolists, i.e. they produce the level of output at which MR = MC.
The long run : Only a normal profit
In the long run firms will enter a profitable monopolistically competitive industry and leave an unprofitable one. Therefore, a monopolistic competitor will earn only a normal profit in the long run, will only break even.
Profits: Firms Enter
Economic profits attract new rivals because entry is relatively easy. As new firms enter, demand curve shifts to the left as the firm now faces larger number of close-substitute products. This decline in demand reduces economic profit.
Losses: Firms Leave
When the industry suffers short-run losses, some firms will exit in the long-run. Faced with fewer substitutes and an expanded share of total demand, surviving firms will see their demand curves shift right. Losses disappear and give way to normal profit.
The equality of price and minimum ATC yields productive efficiency.
The equality of price and marginal cost yields allocative efficiency.
In monopolistic competition neither productive nor allocative efficiency occurs in long-run equilibrium.
In monopolistic competition, the gap between the minimum ATC output and the profit maximizing output identifies excess capacity.
The efficiency loss associated with monopolistic competition is greatly muted by the benefits consumers receive from product variety.
Product differentiation creates a trade off between consumer choice and productive efficiency.