Perfect and imperfect competition

Pure competition

Monopolistic competition and efficiency

Imperfect competition

Profit maximization

Characteristics of pure competition

Pure competition demand

The demand graph is a horizontal line

Large number of buyers and sellers

Easy entry and exit

"Price takers" no real control over price

Standardized products

Firm produces as much or as little of a product at market price

Purely elastic demand

The MR - MC approach for profit maximization

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The TR - TC approach to maximize profit

Past the break-even point

To produce the output level where total revenue exceeds total cost by the greatest amount

Price = marginal revenue

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Short run supply- As long as price exceeds minimum AVC, the firm will continue to produce using the MR = MC

Loss minimizing - Still produce if MR > minimum AVC

Supply is an upsloping line

Characteristics of monopolistic competition

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Monopolistic competition

Easy entry and exit

Nonprice competition

Relatively large number of buyers and sellers

Production differentiation

Excess capacity- a situation where a firm is producing at a lower scale of output than it is designed for.

Price > Marginal cost, condition for allocative efficiency

Price > minimum average total cost Productive inefficiency

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