Microeconomics: Perfect Competition & Monopoly

In a perfectly competitive market, any above-normal profit opportunity is quickly eliminated due to the free entry and exit of firms.

A pure monopoly is a market structure where a single firm is the sole seller of a product with no close substitutes, and entry into the market is completely blocked.

In a pure monopoly, the firm's demand curve IS the market demand curve, meaning they can set prices based on the entire market's demand.

The marginal revenue curve of a monopolist lies below the demand curve. This is because the firm must lower its price to sell one more unit, affecting revenue from all previously sold units.

The goal of a monopolist is to maximize their profits by producing the quantity where marginal revenue (MR) equals marginal cost (MC).

The difference between the price a firm charges and its marginal cost of production. It represents the firm's ability to charge a premium due to product differentiation.

The situation where a firm produces at a level of output below its minimum efficient scale, meaning it could produce more at a lower average cost.

A market structure where firms have some market power due to product differentiation but face competition from other firms offering similar products.

The trade-off faced in monopolistic competition: firms can charge higher prices due to product differentiation, but this leads to excess capacity and potentially higher costs in the long run.

The situation where firms in a monopolistic competition market can enter and exit freely based on profitability. This ensures that no firm earns excessive profits in the long run.

The difference between the price a buyer is willing to pay for a good and the actual price they pay.

The difference between the price a seller receives for a good and the minimum price they would be willing to sell it for.

A market structure where there are many firms selling identical products, with no single firm having any control over the market price.

A market structure where a single firm controls the entire market for a product, and has complete control over price.

The point at which a firm maximizes its profit, where the marginal revenue (MR) equals the marginal cost (MC).

The loss in consumer and producer surplus due to a monopoly’s ability to restrict output and charge a higher price.

A firm's ability to influence the market price of a good by controlling its output.

The reduction in profit due to the entry of new competitors.

In a perfectly competitive market, firms earn only normal profits, which means they cover all their costs, including opportunity costs, but no more. They produce at the point where marginal cost (MC) equals marginal revenue (MR), which is also equal to price in this case. This outcome ensures that the total welfare of the market is maximized, as firms cannot benefit from producing more or less at the given market price.

When demand for a product in a perfectly competitive market rises, the market price increases, which gives existing firms an incentive to produce more. In the short run, firms are able to earn positive economic profits, which are profits above and beyond normal profits. This attracts new firms to enter the market. As new firms enter, the market supply increases, which pushes prices back down. Eventually, the market price falls to a point where firms are only earning normal profits again. At this point, the market is back in long-run equilibrium, although now at a higher level of output and with more firms operating in the market.

The price at which a firm can sell its product in a perfectly competitive market is outside the firm's control. It must accept the market price that is determined by the interaction of market supply and demand. This is because there are many firms selling identical products, and each firm is too small to influence the market price.

In perfectly competitive markets, many firms produce identical products, making each firm's output insignificant compared to the market total. This means that each firm's decisions have no impact on the overall market price.

In perfect competition, there are no barriers to entry or exit for new firms. This means that firms can enter or leave the market freely based on the profitability of the market. This freedom of entry and exit ensures that the market remains competitive as firms can easily enter to take advantage of any positive profits and exit if profits are not sufficient.

Each firm's product has unique features or qualities that distinguish it from competitors' offerings.

In monopolistic competition, firms can charge above normal profits in the short run.

In the long run, firms in a monopolistic competition earn only normal profits.

The demand curve for a firm's product under monopolistic competition slopes downward.

The firm's demand curve under monopolistic competition is relatively elastic due to the existence of many close substitutes.

Firms in monopolistic competition compete by adjusting their prices, quality, features, and marketing efforts to attract customers.

In monopolistic competition, the firm's marginal cost equals its average total cost (ATC = PMC) in the long run.

In perfect competition, the demand curve faced by an individual firm is perfectly elastic (horizontal), meaning they can sell any quantity at the market price. When one firm increases its output, the market price remains constant, as their individual output is insignificant compared to the total market supply.

The marginal revenue (MR) is the additional revenue earned from selling one more unit of output. It is calculated as the change in total revenue (TR) divided by the change in quantity. In perfect competition, the MR is equal to the price (P) because each additional unit sold generates revenue equal to the market price.

In perfect competition, the marginal revenue (MR) remains constant and equal to the price, as it is a horizontal line. This is because the firm can sell any quantity at the same market price. Hence, the MR curve coincides with the demand curve for the firm.

In a pure monopoly, the demand curve is downward sloping. This means that a monopolist can only sell more units by lowering the price of all units. As a result, the additional revenue generated from selling one more unit (MR) is less than the price (P) for all units except the first.

A pure monopolist is a price maker, meaning that they have the power to set the price of their product. This is because the monopolist is the only supplier in the market and faces a downward-sloping demand curve. By setting a price, the monopolist determines the quantity that consumers are willing to buy.

A pure monopoly can choose its price and quantity, but it needs to consider its costs. The monopolist maximizes its profits by producing at the output level where marginal cost (MC) equals marginal revenue (MR) - the point where the MC curve intersects the MR curve. This output level is the profit-maximizing quantity, and then it can set the corresponding price using the demand curve.

The pure monopolist operates in the short run and long run. In the short run, the firm can only adjust its output level. In the long run, the firm can adjust its plant size and technology, but this has to be done within the constraints of barriers to entry that protect the monopoly. This means that the monopolist will continue to earn supernormal profits in the long run without the threat of competition entering the market.

A pure monopoly is an idealized model representing market structures where one firm holds a dominant position, allowing it to potentially exercise market power. The term is often used more loosely to refer to any firm that has a degree of potential market power, even if it's not a pure monopoly.

A pure monopoly enjoys higher prices and higher profits compared to a perfectly competitive firm because of its power to control the market supply and set prices. However, this comes with a tradeoff: monopolies tend to be less efficient and may lead to lower consumer welfare due to reduced output and higher costs.

The existence of barriers to entry, such as government regulations, patents, or control of essential resources, protects a monopoly from competition. These barriers prevent new firms from entering the market and challenging the incumbent monopolist. In the absence of barriers to entry, the profits of the monopolist would attract competition and eventually erode their market power.