1. Chapter 5 Perfect Competition, Monopoly, and Economic vs. Normal Profit

2. Chapter Outline From Perfect Competition to Monopoly
Supply Under Perfect Competition

3. From Perfect Competition to Monopoly
Monopolistic Competition
Oligopoly
Monopoly

4. Picking the Quantity to Maximize Profit The Perfectly Competitive Case
Many Competitors MC
ATC
AVC Q* P* MR

5. Picking the Quantity to Maximize Profit The Monopoly Case
No Competitors MC D MR
ATC Q* P*
AVC

6. Characteristics of Perfect Competition
a large number of competitors, such that no one firm can influence the price
the good a firm sells is indistinguishable from the ones its competitors sell
firms have good sales and cost forecasts
there is no legal or economic barrier to its entry into or exit from the market

7. Monopoly The sole seller of a good or service.
Some monopolies are generated because of legal rights (patents and copyrights).
Some monopolies are utilities (gas, water, electricity etc.) that result from high fixed costs.

8. Monopolistic Competition
Monopolistic Competition: a situation in a market where there are many firms producing similar but not identical goods.
Example : the fast-food industry. McDonald’s has a monopoly on the “Happy Meal” but has much competition in the market to feed kids burgers and fries.

9. Oligopoly
Oligopoly: a situation in a market where there are very few discernible competitors
Examples
Satellite TV service (Direct TV, Dish Network)
Airlines (American, Delta etc.)

10. Which Model Fits Reality?
Perfect competition is rare outside agriculture though it fits some labor markets.
Monopolies are common in utilities
Major branded companies are typically either in oligopolistic or monopolistically competitive industries.

11. Examples of Different Market Forms
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Agriculture
Lumber
Fast Food
Long Distance Service
Cars and Trucks
Soft Drinks
Windows Operating system
Local Residential electric power

12. Distinguishing Characteristics Between Market Forms
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Number of Firms
Many-often thousands or even millions
Several*
Few*
One
Barriers to Entry
None
Few
Substantial
Insurmountable, at least in the short run
Product Similarity
Identical
Similar but not identical
Similar or Identical
N/A
* The line between “several” and “few” is not definite

13. Concentration Ratios
there is no magic line that separates oligopoly from monopolistic competition.
a “concentration ratio” measures the percentage of total market sales for the top firms (from 4 firms to 100 firms).

14. Concentration Ratios For Various Manufacturing Industries
Industry Group
Concentration Ratios
4 Largest Firms
8 Largest Firms
50 Largest Firms
Breakfast Cereals
82.9%
93.5%
100.0%
Ice Cream
32.3
48.7
88.3
Beer
89.7
93.4
96.7
Clothing
17.6
23.2
38.8
Computers and Peripherals
37.0
52.1
86.3
Furniture
11.2
37.2
Long Distance
47.0
74.9
95.4
Cellular Service
51.4
74.6
88.0

15. Supply Under Perfect Competition

16. Normal vs. Economic Profit
Normal Profit : the level of profit that business owners could get in their next best alternative investment
Economic Profit: any profit above normal profit

17. Return on Equity For Various Industries
Industry
Rate of Return
Net Income/(Assets-Liabilities)
Agriculture
8.0%
Manufacturing
14.6%
Transportation and Public Utilities
10.6%
Wholesale and Retail Trade
12.9%

18. When and Why Economic Profits Go to Zero

19. Time Horizons
Short Run: the period of time where we cannot change things like plant and equipment
Long Run : the period of time where we can change things like plant and equipment

20. Market Forms and Economic Profits
Under perfect competition or monopolistic competition, economic profits go to zero because of the entry of new firms increases market supply and lowers prices.
Economic profits are under no pressure to shrink under oligopoly or monopoly because entry doesn’t occur so prices do not fall.

21. Figure 2 The Pressures on Price in Perfect Competition$ Q MC
ATC
AVC
Long Run Pressure
MR4
Short Run Pressure
MR3
MR2
MR1

22. Figure 3 Points of Production in Perfect Competition$ Q MC
ATC
AVC
MR4
MR3
MR2
MR1

23. Figure 4 Supply in Perfect Competition$ Q MC
ATC
AVC
Supply