1. Perfect Competition and Monopoly

2. Alternative Market Structures

3. Alternative market structures Classifying markets by degree of competition  number of firms  freedom of entry to industry  nature of product  nature of demand curve The four market structures  perfect competition  monopoly  monopolistic competition  oligopoly

4. Features of the four market structures

11. Alternative market structures Classifying markets by degree of competition  number of firms  freedom of entry to industry  nature of product  nature of demand curve The four market structures  perfect competition  monopoly  monopolistic competition  oligopoly Structure  conduct  performance

12. Perfect Competition and Monopoly Perfect Competition

13. Perfect competition Assumptions  firms are price takers  freedom of entry  identical products  perfect knowledge Short-run equilibrium of the firm  P = MC  possible supernormal profits

14. O £ (b) Firm Q (thousands) O (a) Industry P Q (millions) S D PePe MC AR D = AR = MR QeQe AC Firm is a price taker. Price is given by the market. Short-run equilibrium of industry and firm under perfect competition

15. Perfect competition Assumptions  firms are price takers  freedom of entry  identical products  perfect knowledge Short-run equilibrium of the firm  P = MC  possible supernormal profits  possible short-run loss

16. QeQe P1P1 D 1 = AR 1 = MR 1 AR 1 OO (a) Industry P£ Q (millions) S D (b) Firm MC AC Q (thousands) Loss is minimised where MC = MR. Loss minimising under perfect competition

17. Perfect competition Assumptions  firms are price takers  freedom of entry  identical products  perfect knowledge Short-run equilibrium of the firm  P = MC  possible supernormal profits  possible short-run loss  short-run supply curve of firm

18. OO (a) Industry P£ P1P1 Q (millions) S D1D1 (b) Firm D 1 = MR 1 MC P2P2 D 2 = MR 2 D2D2 P3P3 D 3 = MR 3 D3D3 Q (thousands) a b c = S Deriving the short-run supply curve

19. Perfect competition Short-run supply curve of industry Long-run equilibrium of the firm  all supernormal profits competed away

20. OO (a) Industry P£ Q (millions) S1S1 D (b) Firm LRAC PLPL P1P1 QLQL SeSe AR 1 D1D1 AR L DLDL Q (thousands) New firms enter Supernormal profits Profits return to normal Long-run equilibrium under perfect competition

21. £ Q O (SR)AC (SR)MC LRAC AR = MR DLDL LRAC = (SR)AC = (SR)MC = MR = AR Long-run equilibrium under perfect competition

22. Perfect competition Short-run supply curve of industry Long-run equilibrium of the firm  all supernormal profits competed away Long-run industry supply curve  effect of external economies and diseconomies on the shape of the curve

23. P Q O Various long-run industry supply curves under perfect competition Long-run S S1S1 D1D1 S2S2 D2D2 a b c (a) Constant industry costs

24. Long-run S P Q O S1S1 D1D1 S2S2 D2D2 a Various long-run industry supply curves under perfect competition b c (b) Increasing industry costs: external diseconomies of scale

25. Long-run S P Q O S1S1 D1D1 S2S2 D2D2 a Various long-run industry supply curves under perfect competition (c) Decreasing industry costs: external economies of scale b c

26. Perfect competition Short-run supply curve of industry Long-run equilibrium of the firm  all supernormal profits competed away long-run industry supply curve  effect of external economies and diseconomies on the shape of the curve Incompatibility of economies of scale with perfect competition

27. Perfect competition Advantages of perfect competition  P = MC  production at minimum AC  only normal profits in long run  responsive to consumer wishes: consumer sovereignty  competition  efficiency  no point in advertising

28. Perfect competition Disadvantages of perfect competition  insufficient profits for investment  lack of product variety  lack of competition over product design and specification

29. Perfect Competition and Monopoly Monopoly

30. Defining monopoly Barriers to entry  economies of scale  product differentiation and brand loyalty  lower costs for an established firm  ownership or control over key factors  ownership or control over outlets  legal restrictions  mergers and takeovers  aggressive tactics  intimidation Natural monopoly

31. LRAC D2D2 D1D1 £ O Q Two firms sharing the market will both make less than normal profit. a b A monopoly can make supernormal profits between a and b. Natural monopoly

32. Monopoly The monopolist's demand curve  downward sloping  MR below AR

33. £ Q O AR MR Average and marginal revenue under monopoly

34. Monopoly The monopolist's demand curve  downward sloping  MR below AR Equilibrium price and output  output where MC = MR

35. MR £ Q O MC QmQm Profit maximised at output of Q m (where MC = MR) Profit maximising under monopoly

36. Monopoly The monopolist's demand curve  downward sloping  MR below AR Equilibrium price and output  output where MC = MR  price given by demand (AR) curve

37. £ Q O MC AC QmQm MR AR AC AR Total profit Profit maximising under monopoly

38. Monopoly The monopolist's demand curve  downward sloping  MR below AR Equilibrium price and output  output where MC = MR  price given by demand (AR) curve Limit pricing

39. AC new entrant AC monopolist £ O Q PLPL Provided price is kept below the limit price (P L ), new firms cannot make a profit. Limit pricing

40. Monopoly Disadvantages of monopoly  high prices / low output: short run

41. AR = D MC MR £ Q O Q1Q1 P1P1 Monopoly Equilibrium of industry under perfect competition and monopoly: with the same MC curve

42. £ Q O MC ( = supply under perfect competition) Q1Q1 MR P1P1 P2P2 Q2Q2 AR = D Comparison with Perfect competition Equilibrium of industry under perfect competition and monopoly: with the same MC curve

43. Monopoly Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate  X-inefficiency Advantages of monopoly  economies of scale

44. £ Q O Q1Q1 MR P1P1 MC monopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves

45. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 P2P2 Q2Q2 MC monopoly AR = D x Higher price (P 2 ) under perfect competition … as long as MC monopoly is below point x Equilibrium of industry under perfect competition and monopoly: with different MC curves

46. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 P2P2 Q2Q2 MC monopoly AR = D x Q3Q3 P3P3 Monopoly could produce at even lower price by producing where MC = P. Equilibrium of industry under perfect competition and monopoly: with different MC curves

47. Monopoly Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate  X-inefficiency Advantages of monopoly  economies of scale  profits can be used for investment  promise of high profits encourages risk taking

48. Perfect Competition and Monopoly Contestable Markets

49. Contestable markets Importance of potential competition  low entry costs  low exit costs Perfectly contestable markets

50. O D = AR LRAC £ Q a P1P1 Q1Q1 A contestable monopoly

51. O D = AR a LRAC £ Q P1P1 AC 1 b Q1Q1 Supernormal profit A contestable monopoly

52. O D = AR a LRAC £ Q P1P1 AC 1 b Q1Q1 Q2Q2 P 2 =AC 2 c The threat of entry drives price down to P 2. A contestable monopoly

53. Contestable markets Importance of potential competition  low entry costs  low exit costs Perfectly contestable markets Hit-and-run competition Importance of the theory of contestable markets Contestable markets and the public interest  similarities with perfect competition  similarities with pure monopoly