Economics Chapter 10: Pure Competition

Market Models

• Four primary market models exist: Pure Competition, Pure Monopoly, Monopolistic Competition, Oligopoly.

Pure Competition

• Characterized by a large number of firms producing identical products.
• Easy entry and exit for firms in the market, enhancing competition.
• Examples include commodities like cotton, where products are nearly indistinguishable.

Pure Monopoly

• Defined by a single firm being the exclusive seller of a product or service.
• Entry of other firms into the market is blocked, granting the monopolist control over the market.
• Produces a unique product, eliminating product differentiation.

Monopolistic Competition

• Involves many sellers producing differentiated products such as clothing and furniture.
• Emphasizes nonprice competition, focusing on product attributes rather than just pricing.
• Entry and exit are relatively easy, fostering competition among firms.

Oligopoly

• Consists of a few sellers offering either standardized or differentiated products.
• Firms are interdependent; decisions by one firm influence others in the market.

Characteristics of Pure Competition

• Very Large Numbers: Many independently acting sellers in large markets, e.g., farm commodities and foreign exchange.
• Standardized Product: Firms produce identical products, with consumers indifferent between sellers as long as prices are the same.
• Price Takers: Individual firms cannot influence market prices; they must accept the prevailing market price.
• Free Entry and Exit: New firms can easily enter and existing firms can exit without significant barriers.

Revenue Concepts

• Average revenue (price per unit) is equal to total revenue divided by quantity sold.
• Total revenue increases consistently with each additional unit sold at a constant price.
• Marginal revenue reflects the change in total revenue resulting from a change in output.