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3. Monopolistic Competition
Market Structure
More Competitive
Less Competitive
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
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4. 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
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5. Monopolistic Competition
Many sellers and buyers
Differentiated product
Perfect mobility of resources
Example: Fast-food outlets
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6. Oligopoly Few sellers and many buyers
Product may be homogeneous or differentiated
Barriers to resource mobility
Example: Automobile manufacturers
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7. 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
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9. Perfect Competition: Price Determination
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10. 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
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12. Perfect Competition: Long-Run Equilibrium
Quantity is set by the firm so that short-run:
Price = Marginal Cost = Average Total Cost
At the same quantity, long-run:
Price = Marginal Cost = Average Cost
Economic Profit = 0
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14. Competition in the Global Economy
Foreign Exchange Rate
Price of a foreign currency in terms of the domestic currency
Depreciation of the Domestic Currency
Increase in the price of a foreign currency relative to the domestic currency
Appreciation of the Domestic Currency
Decrease in the price of a foreign currency relative to the domestic currency
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18. 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
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19. Monopoly Short-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 (MC)
Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output
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23. 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
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