Market Structures: Pure Competition & Monopoly Flashcards

Questions and Answers

What are the four characteristics of Pure Competition?

Standardized Product (correct)

Large number of sellers (correct)

Freedom of entry and exit (correct)

Price Takers (correct)

Monopolistic Pricing

What happens in a market with a large number of sellers?

Each seller is independent and has perfect information.

What does a standardized product mean?

Products are the same across sellers.

What is meant by freedom of entry and exit in a market?

Firms can enter and exit the market as they see fit. Signup and view all the answers

What are price takers?

Individual sellers have no significant control over price. Signup and view all the answers

What is the demand curve for a firm in a Pure Competition structure?

Perfectly elastic Signup and view all the answers

What is the relationship between price, marginal revenue, and demand in a Pure Competition Structure?

Price is equal to demand and marginal revenue (P=MR=D) Signup and view all the answers

What does profit maximization in Pure Competition entail?

The difference between total revenue and total cost is at the highest point (MC=MR). Signup and view all the answers

What is indicated by short-run profit maximization?

Average cost below the demand curve means profit. Signup and view all the answers

What are short-run losses?

Average costs above the demand curve result in a loss. Signup and view all the answers

What should firms consider when facing losses but remaining open?

Average variable cost (AVC) must fall below the demand curve (P>AVC). Signup and view all the answers

Under what condition should a firm shut down?

If the average variable cost is above the demand curve (P < AVC). Signup and view all the answers

What role does a monopolist play in the market?

The monopolist controls the quantity sold and thus has control over the price. Signup and view all the answers

How is the demand curve characterized in a pure monopoly?

Demand is highly inelastic and downward sloping. Signup and view all the answers

What are the two steps to regulating a monopoly?

Make a monopoly efficient and establish a fear return point. Signup and view all the answers

How is profit maximization represented graphically in Pure Competition?

By the greatest distance between total cost and total revenue. Signup and view all the answers

In what market structure do marginal revenue and product price equal each other?

Pure competition. Signup and view all the answers

What happens when average total cost intersects with marginal cost and marginal revenue at the same point?

Both productive and allocative efficiency are achieved. Signup and view all the answers

What occurs when a purely competitive firm is in long-run equilibrium?

Marginal revenue equals marginal cost, price equals marginal cost, total revenue equals total cost. Signup and view all the answers

What does the marginal revenue of a firm equate to in pure competition?

Product price. Signup and view all the answers

What do firms seek to maximize?

Total profit. Signup and view all the answers

In the short run, how does a purely competitive firm maximize profit?

By producing where total revenue exceeds total cost by the maximum amount. Signup and view all the answers

Study Notes

Pure Competition Characteristics

Large number of sellers leads to independence and perfect information among competitors.
Products are standardized, making consumers indifferent; they seek the lowest price with no brand loyalty.
Freedom of entry and exit allows firms to enter or leave the market freely based on their desires.
Price takers exist due to the vast number of sellers; individual firms cannot influence pricing, as the market dictates it.

Demand Curve and Revenue

The demand curve within pure competition is perfectly elastic, indicating that firms can sell as much as they desire at the market price.
In a pure competition structure, price equals demand (P = D) and marginal revenue (MR), reflecting a balance in market dynamics.

Profit Maximization

Profit maximization occurs where the difference between total revenue and total cost is maximized, identified by the condition MC = MR.
Short-run profit maximization exists when average costs (AC) are below the demand curve, indicating potential profits.

Short-Run Outcomes

Profits are maximized at the intersection of marginal cost and marginal revenue. The quantity where AC intersects demand defines potential profits.
Short-run losses arise when average costs exceed the demand curve, leading to a situation where costs are higher than prices.

Shutdown Conditions

Firms may choose to remain open even during losses if average variable costs (AVC) are below the demand curve (P > AVC).
A firm should close if its AVC is above the demand curve (P < AVC).

Monopoly Characteristics

Monopolists act as price makers, controlling both the quantity of goods sold and the price, making the market equivalent to the firm.
In pure monopoly, the demand curve is inelastic and downward sloping, with marginal revenue falling below demand allowing for potential excess pricing.

Regulation of Monopolies

Regulation aims to improve monopolistic efficiency and find a compromise where prices are reduced but still above average costs.

Graphical Representation in Pure Competition

Graphically, profits are maximized at the greatest distance between total revenue and total cost curves.
In pure competition, marginal revenue equals product price, ensuring a direct correlation between the two.

Long-Run Equilibrium

A purely competitive firm achieves long-run equilibrium when marginal revenue equals marginal cost, price equals marginal cost, and total revenue aligns with total cost.
The condition of minimum average total cost equaling price indicates an efficient allocation of resources.

Firm Objectives

Firms aim to maximize total profit, seeking the highest total revenue in relation to total costs.
In the short run, a competitive firm will produce at a level that maximizes the difference between total revenue and total costs.

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Description

Explore the key concepts of market structures with our flashcards on Pure Competition and Monopoly. Learn the four characteristics that define pure competition and understand the nuances that set it apart from monopoly. Perfect for students looking to ace their economics exams.