Microeconomics: Market Structures Overview

A perfectly competitive firm faces a demand curve that is perfectly elastic. This means that the firm can sell any quantity of its output at the market price, but if it raises its price even slightly, it will lose all of its customers.

Marginal cost is the additional cost incurred when producing one more unit of output. It is calculated by dividing the change in total cost by the change in output.

Monopolistic competition is a market structure characterized by many firms selling differentiated products, each with a slight degree of market power. This means that firms face a downward-sloping demand curve for their products. However, there are relatively low barriers to entry in this market.

A natural monopoly arises when a single firm can produce the entire output of the market at a lower cost than multiple firms. This often occurs when there are significant economies of scale in production. For example, utilities like water or electricity often exhibit natural monopoly characteristics.

The short-run supply curve of a perfectly competitive firm is its marginal cost curve above the point where it intersects the average variable cost curve. This means that the firm will only produce if the price is high enough to cover its variable costs.

Price discrimination occurs when a firm charges different prices to different customers for the same product, based on their willingness to pay. This is possible when the firm has market power and can segment its customers.

In perfect competition, the long-run equilibrium occurs when all firms in the market are earning zero economic profit. This means that the price is equal to the minimum average total cost of production. In this situation, firms have no incentive to enter or exit the market.

A monopolist will maximize profits by producing the quantity of output where marginal revenue equals marginal cost. Because a monopolist faces a downward-sloping demand curve, its price will be higher than marginal cost.

Average revenue is calculated by dividing total revenue by the quantity of goods sold.

In perfect competition, firms are price takers, meaning they cannot influence the market price of their product. They must accept the prevailing market price.

A perfectly competitive firm maximizes profit by producing at the output level where marginal revenue (MR) equals marginal cost (MC).

Demand is elastic when a change in price leads to a proportionally larger change in quantity demanded. So, if the price increases, the total revenue will decrease.

A monopoly is likely to be productively inefficient because it restricts output to maximize profit. This leads to a higher price and lower quantity compared to a perfectly competitive market.

The demand curve faced by a monopolist is the same as the market demand curve. This is because a monopolist is the sole seller in the market.

Perfect competition achieves allocative efficiency when price equals marginal cost. This means that resources are allocated to their most valued uses.

In the short run, if a perfectly competitive firm's price is greater than its average total cost, the firm earns an economic profit. This means that the firm is making more than it needs to cover its costs.

Large economies of scale can act as a barrier to entry, making it difficult for new firms to compete with existing firms that can produce at lower costs due to their size.