5 Questions
Explain the assumptions, price and output decisions in perfect competition market structure.
Perfect competition assumes many small firms, identical products, freedom of entry and exit, perfect information, and profit maximization. Price is determined by the intersection of market demand and supply, while output is determined where marginal cost equals marginal revenue.
Describe the equilibrium of the firm and the industry in the short and long runs under perfect competition.
In the short run, the firm reaches equilibrium where marginal cost equals marginal revenue and price equals average total cost. In the long run, all firms adjust to the equilibrium price, resulting in zero economic profit.
What is the concept of excess capacity in monopolistic competition?
Excess capacity refers to the situation where firms produce at a lower quantity and higher cost than the minimum average cost point, leading to inefficiency and underutilization of resources.
Explain the behavior of a monopolist in the short and long run.
In the short run, a monopolist maximizes profit by producing where marginal cost equals marginal revenue. In the long run, the monopolist can earn economic profit due to barriers to entry, leading to a lack of competition.
Discuss the different degrees of price discrimination by a monopolist.
First-degree price discrimination involves charging each consumer their maximum willingness to pay, second-degree involves quantity discounts, and third-degree involves charging different prices to different groups of consumers based on their price elasticity of demand.
Study Notes
Market Structures
- Theory of the Firm: Deals with how a firm determines equilibrium price and output in different kinds of markets.
- Market Morphology: The analysis of market structure.
Market Components
- Buyers: One of the basic components of a market.
- Sellers: One of the basic components of a market.
- Commodity: One of the basic components of a market.
- Price: One of the basic components of a market.
Perfect Competition
- Assumptions: Necessary conditions for a perfectly competitive market.
- Price and Output Decisions: Firms make decisions based on market conditions.
- Equilibrium of the Firm and Industry: In both short and long runs.
- Long Run Supply: Industry's supply in the long run.
- Producer Surplus: The difference between the market price and the minimum price a producer is willing to accept.
- Shut Down Point: The point at which a firm decides to shut down production.
Monopoly
- Behavior of a Monopolist: In both short and long runs.
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Price Discrimination: Types:
- 1st Degree: Charging each customer a unique price.
- 2nd Degree: Charging different prices for different quantities.
- 3rd Degree: Charging different prices to different customer groups.
Monopolistic Competition and Oligopoly
- Monopolistic Competition: A market structure characterized by excess capacity.
- Oligopoly: A market structure with few firms.
- Collusive Model: Firms collude to set prices and outputs.
- Non-Collusive Model: Firms make decisions independently.
Test your understanding of market structures with this quiz covering perfect competition and monopoly. Explore assumptions, price and output decisions, equilibrium in the short and long runs, industry long run supply, producer surplus, and the behavior of a monopolist in both the short and long run. Delve into price discrimination by a monopolist, including 1st and 2nd degree strategies.
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