Perfect Competition & Monopoly ECO 101 PDF

REVIEWER FOR FINALS (ECO 101) and consumer welfare. Monopoly Defining Perfect Competition A monopoly is defined as a single firm in an industry Definitio...

REVIEWER FOR FINALS (ECO 101) and consumer welfare. Monopoly Defining Perfect Competition A monopoly is defined as a single firm in an industry Definition: A market structure where many small firms with no close substitutes. An industry is an association of sell identical products, and no single firm has market firms that manufacture the same goods. control. Types of Monopoly Characteristics: - Many sellers and buyers Natural Monopoly: Arises when a single firm can supply - Homogeneous products the entire market at a lower cost than multiple firms - Free market entry and exit (e.g., utilities). - Perfect information (buyers and sellers are fully Government Monopoly: Established by government informed) regulations (e.g., postal services). Short-Run Equilibrium Geographic Monopoly: Occurs when a firm has exclusive control over a market in a particular area (e.g., Explanation: In the short run, firms can make profits or local businesses). losses. Types of Market Structures Profit Maximization: Firms produce where marginal cost Price Taker: This refers to firms that accept the market (MC) equals marginal revenue (MR). price as given and cannot influence it. They operate in perfectly competitive markets. [Graph: Display a short-run equilibrium graph to show Price Maker: This refers to firms that have the ability to profit or loss at MC = MR] influence the price of their goods or services. They Long-Run Equilibrium operate in monopolistic or imperfectly competitive markets. Explanation: In the long run, firms earn zero economic Monopolistic Competition profit due to free entry and exit. This describes a market structure in which there are Result: Market supply adjusts so that price equals many firms selling products that are similar but not average cost (AC). identical. Firms in this market has a monopoly over the product it makes but other firms make similar products [Graph: Include a graph showing long-run equilibrium at that compete for the same customers. P = AC] Advantages of Perfect Competition Oligopoly Allocative Efficiency: Resources are allocated to their A market structure in which only a few sellers offer best use. similar or identical products. The number of sellers must Productive Efficiency: Firms produce at the lowest exceed two but less than five; possible cost. Consumer Benefits: Prices remain low, maximizing Simplest form of oligopoly that has two members is consumer surplus. called Duopoly. Limitations of Perfect Competition Market Lack of Product Variety: Homogeneity can limit choices. Innovation Barriers: Limited incentives for innovation A market is where buyers and sellers meet to exchange due to low profits. products and services. There must be buyers and sellers. Real-World Rarity: Few industries meet all perfect The goods being exchanged may be physical products or competition criteria. intangible services. The value given to the items or services being exchanged. The act of exchanging one thing for another, usually money. Monopoly and Market Power Monopoly and market power are crucial concepts in microeconomics as they represent various market structures and their influence on pricing, competition, Market Failure Overview of Labor Markets Labor markets facilitate the matching of workers and A market failure occurs when there is unequal employers. distribution of goods and services, resulting in a lack of Key Participants: Workers (supply), employers equilibrium in a free market. The law of supply and (demand), and the government (regulation). demand is intended to bring prices into equilibrium. Market failure can result from a lack of information, market control, public goods, or externalities. Factors Affecting Wages Skill Level & Education: Higher skills typically lead to Public good - a good that is both non-excludable and higher wages. non-rivalrous in that individuals cannot be excluded Experience: Senior employees may earn more. from use or could be enjoyed without paying for it. And Industry & Location: Some sectors and areas offer where use by one individual does not reduce availability higher pay. to others or the goods can be effectively consumed Unionization: Collective bargaining helps secure higher simultaneously by more than one. wages. 3 CHARACTERISTICS OF PUBLIC GOODS 1. Non-divisibility Introduction to International Trade 2. Non-rivalry The exchange of goods and services across borders. 3. Non-exclusivity Key Concepts: - Exports and Imports Non-rivalry - This means that its consumption does not - Balance of Trade (Surplus vs. Deficit) involve competition. i.e., one person can increase consumption of the good without reducing consumption by others, e.g., of roads. Information Asymmetry Non-exclusivity - means that, it is difficult for the When one party has more or better information than the supplier to exclude anyone who does not pay for the other. commodity from enjoying. Examples: Free-rider – is a person who receives the benefit of a - Insurance Markets: Buyers may hide health risks. good but avoids paying for it - Used Cars: Sellers know the condition better. Externality - the cost or benefit that affects a party who did not choose to incur that cost or benefit. It is the loss Adverse Selection and Moral Hazard or gain in the welfare of one party resulting from an Adverse Selection: High-risk individuals are more activity of another party, without there being any likely to buy insurance. compensation for the losing party. Externalities are an Moral Hazard: After insurance, people take more risks. important consideration. Trade Barriers Introduction to Income Distribution Definition: Income distribution is the way total income Types of Barriers: is divided among individuals or groups. - Tariffs: Taxes on imports. Importance: Helps assess economic health and fairness. - Quotas: Limits on quantity. - Subsidies: Government support to local industries. Effects: Causes of Income Inequality - Protect local industries. Education and Skills: Higher education typically leads to - Reduce trade efficiency. higher earnings. Benefits of International Trade Technological Change & Globalization: Automation and Specialization: Focus on areas of efficiency. offshoring impact job availability. Increased Variety: Access to diverse goods. Government Policies: Tax and welfare programs Economic Growth: Boost in production and influence income distribution. employment. Social Factors: Discrimination based on gender, race, Technology Transfer: Sharing innovations. etc., can lead to inequality.