1. Profit Maximisation under Perfect Competition
and Monopoly

2. Alternative Market Structures
Classifying markets (by degree of competition)
number of firms
freedom of entry to industry
free, restricted or blocked?
nature of product
homogeneous or differentiated?
nature of demand curve
degree of control the firm has over price 2

3. Alternative Market Structures
The four market structures
perfect competition
monopoly
monopolistic competition
oligopoly 2

4. Features of the four market structures

5. Features of the four market structures

6. Features of the four market structures

7. Features of the four market structures

8. Features of the four market structures

9. Features of the four market structures

10. Alternative Market Structures
The four market structures
perfect competition
monopoly
monopolistic competition
oligopoly
Structure  conduct  performance 2

11. Perfect Competition Assumptions Distinction between short and long run
firms are price takers
freedom of entry of firms to industry
identical products
perfect knowledge
Distinction between short and long run
normal profits
supernormal profits 4

12. Perfect Competition Short-run equilibrium of the firm Price Output
given by market demand and supply
Output
where P = MC
Profit
(AR – AC) × Q
possible supernormal profits 4

13. Short-run equilibrium of industry and firm under perfect competitionAC MC P S D AR
D = AR
= MR Pe AC O O Qe
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

14. Loss minimising under perfect competitionAC MC P S AC
D1 = AR1
= MR1
AR1 Qe P1 D O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

15. Short-run shut-down point
AVC P AC MC S D2
AR2
D2 = AR2
= MR2 P2 O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

16. Perfect Competition Short-run equilibrium of the firm (cont.)
short-run supply curve of firm
the MC curve
Short-run supply curve of industry
sum of supply curves of firms 4

17. Perfect Competition The long run long-run equilibrium of the firm
all supernormal profits competed away 5

18. Long-run equilibrium under perfect competition
Profits return
to normal
New firms enter
Supernormal profits
LRAC P S1 D Se P1
AR1 D1 PL
ARL DL O O QL
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

19. Perfect Competition The long run long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR 5

20. Long-run equilibrium of the firm under perfect competition
LRAC
Long-run equilibrium of the firm under perfect competition
(SR)MC
(SR)AC
AR = MR DL
LRAC = (SR)AC = (SR)MC = MR = AR O Q

21. Perfect Competition The long run long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR
long-run industry supply curve 5

22. Perfect Competition The long run long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR
long-run industry supply curve
incompatibility of economies of scale with perfect competition 5

23. Perfect Competition The long run
long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR
long-run industry supply curve
incompatibility of economies of scale with perfect competition
Does the firm benefit from operating under perfect competition? 5

24. Monopoly Defining monopoly importance of market power
concentration ratios 8

25. Concentration ratios in the UK

26. Monopoly Barriers to entry economies of scale
product differentiation and brand loyalty
lower costs for an established firm
ownership/control of key factors or outlets
legal protection
mergers and takeovers
aggressive tactics 8

27. Monopoly
The monopolist's demand curve
downward sloping
MR below AR 8

28. AR and MR curves for a monopolyQ
(units)
P =AR
(£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2
AR, MR (£) AR
Quantity

29. AR and MR curves for a monopolyQ
(units)
P =AR
(£) TR
(£) MR
(£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2 8 14 18 20 6 4 2 -2 -4
AR, MR (£) AR
Quantity MR

30. Monopoly
Equilibrium price and output
MC = MR 8

31. Profit maximising under monopolyMC MR O Qm Q

32. Monopoly Equilibrium price and output MC = MR
measuring level of supernormal profit 8

33. Profit maximising under monopolyMC MR O Qm Q

34. Profit maximising under monopolyMC AC AR AR AC MR O Qm Q

35. Profit maximising under monopolyMC
Total profit AC AR AR AC MR O Qm Q

36. Monopoly Equilibrium price and output
MC = MR
measuring level of supernormal profit
Monopoly versus perfect competition 8

37. Monopoly Equilibrium price and output
MC = MR
measuring level of supernormal profit
Monopoly versus perfect competition
lower output at a higher price 8

38. Equilibrium of industry under perfect competition and monopoly: with the same MC curve
AR = D MR
Monopoly P1 O Q1 Q

39. Equilibrium of industry under perfect competition and monopoly: with the same MC curve
MC ( = supply under
perfect competition)
Comparison with
Perfect competition P1 P2
AR = D MR O Q1 Q2 Q

40. Monopoly Equilibrium price and output
MC = MR
measuring level of supernormal profit
Monopoly versus perfect competition
lower output at a higher price
short run and long run 8

41. Monopoly Equilibrium price and output
MC = MR
measuring level of supernormal profit
Monopoly versus perfect competition
lower output at a higher price
short run and long run
costs under monopoly 8

42. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MCmonopoly P1
AR = D MR O Q1 Q

43. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MC ( = supply)perfect competition
MCmonopoly P2 P1 x P3
AR = D MR O Q2 Q1 Q3 Q

44. Monopoly Equilibrium price and output
MC = MR
measuring level of supernormal profit
Monopoly versus perfect competition
lower output at a higher price
short run and long run
costs under monopoly
innovation and new products 8

45. Contestable Markets Importance of potential competition
low entry costs
low exit costs
Perfectly contestable markets
Contestable markets & natural monopolies
The importance of costless exit
absence of sunk costs
hit-and-run competition
Assessment of the theory 11