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PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Market Structure
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Mor
e C
ompe
titiv
eLess C
ompetitive
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Perfect Competition
• Many buyers and sellers
• Buyers and sellers are price takers
• Product is homogeneous
• Perfect mobility of resources
• Economic agents have perfect knowledge
• Example: Stock Market
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopolistic Competition
• Many sellers and buyers
• Differentiated product
• Perfect mobility of resources
• Example: Fast-food outlets
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Oligopoly
• Few sellers and many buyers
• Product may be homogeneous or differentiated
• Barriers to resource mobility
• Example: Automobile manufacturers
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopoly
• Single seller and many buyers
• No close substitutes for product
• Significant barriers to resource mobility– Control of an essential input– Patents or copyrights– Economies of scale: Natural monopoly– Government franchise: Post office
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Perfect Competition:Price Determination
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Perfect Competition:Short-Run Equilibrium
Firm’s Demand Curve = Market Price
= Marginal Revenue
Firm’s Supply Curve = Marginal Cost
where Marginal Cost > Average Variable Cost
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Perfect Competition:Short-Run Equilibrium
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Perfect Competition:Long-Run Equilibrium
Price = Marginal Cost = Average Total Cost
Quantity is set by the firm so that short-run:
At the same quantity, long-run:
Price = Marginal Cost = Average Cost
Economic Profit = 0
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Perfect Competition:Long-Run Equilibrium
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopoly
• Single seller that produces a product with no close substitutes
• Sources of Monopoly– Control of an essential input to a product– Patents or copyrights– Economies of scale: Natural monopoly– Government franchise: Post office
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
MonopolyShort-Run Equilibrium
• Demand curve for the firm is the market demand curve
• Firm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR)
• Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
MonopolyShort-Run Equilibrium
Q* = 500
P* = $11
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
MonopolyLong-Run Equilibrium
Q* = 700
P* = $9
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Social Cost of Monopoly
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopolistic Competition
• Many sellers of differentiated (similar but not identical) products
• Limited monopoly power
• Downward-sloping demand curve
• Increase in market share by competitors causes decrease in demand for the firm’s product
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopolistic CompetitionShort-Run Equilibrium
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopolistic CompetitionLong-Run Equilibrium
Profit = 0
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.
Monopolistic CompetitionLong-Run Equilibrium
Cost without selling expenses
Cost with selling expenses
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