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Perfect & Imperfect Competition, . - Coggle Diagram
Perfect & Imperfect Competition
Four Market Structures
Monopolistic competition: (1) relatively large number of firms (2) differentiated products (3) some, but limited control over price (4) relatively easy entry and exit (5) considerable nonprice competition
Oligopoly: (1) few firms (2) standardized/differentiated products (3) limited control over price by interdependence, except collusion (4) significant obstacles to entry and exit (5) typically nonprice competition
Pure/perfect competition: (1) very large number of firms (2) standardized products (3) no control over price (4) no entry and exit barriers (5) no nonprice competition
Pure monopoly: (1) one firm (2) unique product (3) considerable control over price (4) blocked entry and exit (5) nonprice competition may or may not occur
Pure/Perfect Competition: Demand
Average revenue (AR): (1) revenue per unit = TR/Q (2) P = AR
Total revenue (TR): (1) TR = P x Q (2) straight upsloping line (3) rises by the product price for each additional unit sold
Marginal revenue (MR): revenue from sale of one more unit = change in TR / change in quantity sold (3) same throughout
Individual firm: (1) perfectly elastic demand - horizontal line - at market price (2) sell as much or little output desired at market price (3) cannot affect price by changing output
Market demand: (1) downward sloping curve (2) can affect price by changing industry output
D = MR = AR
TR-TC Approach
Maximize profit where TR>TC by max. amount
Law of diminishing return: (1) TC increases with output (2) Lower levels of output = increasing returns (TC increase at decreasing rate) (3) Higher levels of output = diminishing returns (TC increase at increasing rate)
Breakeven point: (1) TR = TC (2) normal profit; not economic profit
3 Questions: (1) produce? (2) amount? (3) economic profit (or loss) ?
Adjust output: realize max. profit / min. loss
MC & Short Run Supply
Market supply: horizontal sum of individual supply curves
Market equilibrium price: industry market supply curve intersects industry market demand curve
Segment of MC curve above AVC curve, as long as P > min. AVC
Firm vs Industry: fallacy of composition = false notion that what is true for an individual is true for a group
Monopolistic Competition
Monopolistically competitive industries: (1) four-firm concentration ratio (%) = ratio of output of four largest firms/total output in industry (2) Herfindahl index = sum of squared % market shares in of all firms in industry
Easy entry and exit: (1) few economies of scales (2) low capital requirements (3) financial barriers exist
Differentiated products: (1) product attributes (2) service (3) location (4) brand names & packaging (5) some control over price
Relatively large number of sellers: (1) small market shares (2) no collusion (3) independent action
Advertising: (1) nonprice competition = advertise distinguished products to consumers (2) greater purchasing power = raise P without drastically reducing Qd; increases as demand becomes inelastic
Pure/Perfect Competition: Characteristics
Standardized product: (1) identical or homogenous (2) perfect substitutes
Price takers: (1) cannot change market price (2) adjust to market price (3) firms produce small fraction of total output
Very large numbers: (1) independently acting sellers (2) large national or international markets
Free entry & exit: (1) no significant legal, technological, financial or other obstacles
Profit Maximization: Short Run
TR-TC
MR-MC
MR-MC Approach
Profit maximizing case: economic profit = (P-A) x Q, where A is ATC
Loss minimizing case: if P > min. AVC but is < ATV
Shut down case: if P < min. AVC
MR=MC rule features: (1) MR and MC = fractional level of output: produce where MR>MC (2) applies only if producing is preferrable to shutting down (3) accurate guide to for all market structures (4) MR (= P in pure competition) = MC
MR=MC rule: max. profit / min. loss by producing output where MR=MC if P = or > AVC
Monopolistic Competition
Long run: (1) easy entry and exit cause normal profit (2) profits = firm enter & economic profit decrease (3) loss = firm exit & economic profit increase
Inefficient: (1) productive efficiency: P>min. ATC (2) allocative efficiency: P>MC
Short run: produce output where MR=MC
Excess capacity: (1) produce less output than min. ATC (2) plant & equipment underutilized
Demand curve: less elastic that pure competition; more elastic than pure monopolist competition
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