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perfect and imperfect competition, Demand and Supply - Coggle Diagram

- - - - In pure competition, prices are determined solely by market forces of supply and demand. Individual firms have no control over the price, so they are price takers. They must accept the market-determined price, making them highly price-sensitive.
    - - In pure competition, prices are determined by the interaction of supply and demand in the market. Individual firms have no control over the price of their product. They take the prevailing market price as given and adjust their quantity supplied accordingly. This means they are "price takers."
    - - New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in a competitive market.
    - - Purely competitive businesses create standardized goods. Customers don't mind which seller they buy from as long as the price is the same.
  - - - marginal cost-marginal revenue approach
        
        Profit maximising case :profit=(P-A)-Q
        
        Loss minimizing case:MC>MR
        
        Shutdown case:MR (=P) =MC
        
        MR=MC RULE
        
        accurate guide to profit maximization for all firms
      - total revenue-total cost approach
        
        break-even point: an output at which a firm makes a normal profit but not an economic profit
        
        break-even point occurs where total cost catches up with total revenue,
        
        (1) Should we produce this product? (2) If so, in what amount? (3) What economic profit (or loss) will we realize?
  - - - in the long run, firms in pure competition achieve a state of equilibrium where they earn only normal profit. Normal profit covers all costs, including opportunity costs for the owner's time and capital. Economic profit, which is above normal profit, attracts new firms into the market, driving down prices until only normal profit remains.
    - - •Entry and exit only: The only long-run adjustment in our graphical analysis is caused by firms' entry or exit.
      - Constant-cost industry :The industry is a constant-cost industry. That is, the entry and exit of firms do not affect resource prices or, consequently, the individual firms' ATC curve
      - • Identical costs All firms in the industry have identical cost curves
  - - - technology shifts supply curve downwards,indicates increase in supply
      - wages will shift supply curve upwards, indicates decrease in supply
    - - to determine the equilibrium price and output, we must compare the total-supply data with total-demand data
    - - firm versus industry
        
        fallacy of composition:The false notion that what is true for the individual (or part) is necessarily true for the group (or whole).
- - - - In a pure, or absolute, monopoly, a single firm is the sole producer of a specific good or the sole supplier of a service; the firm and the industry are synonymous
    - - The pure monopolist controls the total quantity supplied and thus has considerable control over price; it is a pricemaker
    - - A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological, legal, or of some other type.
        
        Economies of Scale: Monopolies often achieve significant economies of scale, meaning their average costs decrease as they produce more. New entrants would need to match or surpass the monopolist's production levels to be competitive, which can be financially challenging.
        
        Network Effects: In certain markets, the value of a product or service increases as more people use it. Social media platforms and telecommunications networks are examples. Established networks have a significant advantage, as new entrants struggle to attract users.
        
        Legal Barriers: Monopolies can be protected by legal barriers such as patents, copyrights, and trademarks. Patents, for example, grant exclusive rights to produce a specific product or use a particular technology for a set period, preventing others from entering the market with the same product.
        
        Ownership or Control of Essential Resources:A monopolist can use private property as an obstacle to potential rivals
        
        Pricing and Other Strategic Barriers to Entry:Even if a firm is not protected from entry by, say, extensive economies of scale or ownership of essential resources, entry may effectively be blocked by the way the monopolist responds to attempts by rivals to enter the industry.
    - - The product produced by a pure monopolist may be either standardized or differentiated. Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products attributes.
  - - - three important implications
        
        marginal revenue is less than price:With a fixed downward sloping demand curve, the pure monopolist can increase sales only by charging a lower price. its MR curve lies below its demand curve
        
        The Monopolist Is a Price-maker:
        All imperfect competitors, whether pure monopolists, oligopolists, or monopolistic competitors, face downward sloping demand curves.
        As a result, any change in quantity produced causes a movement along their respective demand curves and a change in the price they can charge. Firms with downward sloping demand curves are thus pricemakers
        
        the monopolist sets prices in the elastic region of demand : the aim of this is to maximize profit
  - - - assume that although the firm is a monopolist in the product market, it hires resources competitively and employs the same technology and, therefore, has the same cost structure as the purely competitive firm
    - - A monopolist seeking to maximize total profit will use the same rationale as a profit-seeking firm in a competitive industry. If producing is
        preferable to shutting down, it will produce the output at which marginal revenue equals marginal cost (MR = MC).
    - - Recall that MR equals P in pure competition and that the supply curve of a purely competitive firm is determined by applying the MR (= P) = MC profit-maximizing rule. At any specific market-determined price, the purely competitive seller will maximize profit by supplying the quantity at which MC is equal to that price. When the market price increases or decreases, the competitive firm adjusts its output. Each market price is thus associated with a specific output, and all such price-output pairs define the supply curve. This supply curve turns out to be the portion of the firm's MC curve that lies above the AVC curve
    - - Not Highest Price
        Because a monopolist can manipulate output and price, people often believe it will charge the highest price possible. That is incorrect.
        There are many prices above Pm, but the monopolist shuns them because they yield a smaller-than-maximum total profit. The monopolist seeks maximum total profit, not maximum price.
      - Total, Not Unit, Profit
        The monopolist seeks maximum total profit, not maximum unit profit
    - - Possibility of Losses by Monopolist
        The likelihood of economic profit is greater for a pure monopolist than for a pure competitor. In the long run, the pure competitor is destined to have only a normal profit, whereas barriers to entry mean that any economic profit realized by the monopolist can persist. pure monopoly, there are no new entrants to increase supply, drive down price, and eliminate economic profit.
  - - - price-output combination results in both productive efficiency and allocative efficiency. Productive efficiency is achieved because free entry and exit force firms to operate where ATC is at a minimum. The sum of the minimum-ATC outputs of the 1,000 pure competitors is the industry output, c. Product price is at the lowest level consistent with minimum average total cost.
        The allocative efficiency of pure competition results because production occurs up to the output at which price (the measure of a product's value or marginal benefit to society) equals marginal cost (the worth of the alternative products forgone by society in producing any given commodity). In short: P = MC = minimum ATC.
    - - In general, a monopoly transfers income from consumers to the owners of the monopoly. The owners receive the income as revenue.
        Because a monopoly has market power, it can charge a higher price than would a purely competitive firm with the same costs. So the monopoly in effect levies a "private tax" on consumers. This private tax can often generate substantial economic profits that can persist because entry to the industry is blocked.
    - - economics of scale
        
        Where economies of scale are extensive, market demand may not be sufficient to support a large number of competing firms, each producing at minimum efficient scale. In such cases, an industry of one or two firms would have a lower average total cost than would the same industry made up of numerous competitive firms. At the extreme, only a single firm- natural monopoly-might be able to achieve the lowest long-run average total cost.
      - technological advance
        
        In the very long run, firms can reduce their costs through the discovery and implementation of new technology. If monopolists are more likely than competitive producers to develop more efficient production techniques over time, then the inefficiency of monopoly might be overstated.
      - X inefficiency
        
        The production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output.
      - rent seeking expenditure
        
        Attempts by individuals, firms, or unions to use political influence to receive payments in excess of the minimum amount they would normally be willing to accept to provide a particular good or service.
    - - Fortunately, monopoly is not widespread in the United States. Barriers to entry are seldom completely successful. Although research and technological advance may strengthen a monopoly's market position, technology may also undermine monopoly power. Over time, the creation of new technologies may destroy monopoly positions. For example, the development of courier delivery, fax machines, and e-mail has eroded the monopoly power of the U.S. Postal Service. Similarly, cable television monopolies are now challenged by satellite TV and by Internet streaming services such as Netflix and Disney+.
  - - - Monopoly power :The seller must be a monopolist or, at least, must possess some degree of monopoly power-that is, some ability to control output and price.
      - Market segregation: At relatively low cost to itself, the seller must be able to segregate buyers into distinct classes, each with a different willingness or ability to pay for the product. This separation of buyers is usually based on different price elasticities of demand.
      - No resale The original purchaser cannot resell the product or service. This condition suggests that service industries, such as the transportation industry or the industries for legal and medical services, where resale is impossible, are good candidates for price discrimination.
  - - - The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.
    - - For natural monopolies subject to rate (price) regulation, the price that would allow the regulated monopoly to earn a normal profit, a price equal to average total cost.
    - - The trade-off faced by a regulatory agency in setting the maximum legal price a monopolist may charge:
        The socially optimal price is below average total cost (and either bankrupts the firm or requires that it be subsidized), while the higher, fair-return price does not produce allocative efficiency.