1. Perfect Competition and Monopolistic Competition
Professor Kyle Anderson
Managerial Economics
Kelley School of Business
Indiana University

2. Perfectly Competitive Markets
Many buyers and sellers
Identical products
Perfect information
No transaction costs
Free entry and exit into the market

3. Perfectly Competitive MarketsQM $ D S
Firm Qf $ Df Pe

4. Perfectly Competitive FirmMC $ Qf
ATC
AVC Pe
Pe = Df = MR
Qf*

5. Perfectly Competitive MarketsQM $ D S Pe
Firm Qf $ Df S*
Entry
Pe*
Df*

6. Perfectly Competitive FirmMC $ Qf
ATC
AVC Pe
Pe = Df = MR
Pe = Df = MR
Pe = Df = MR
Qf*
Qf*
Qf*

7. 30 Seconds of Economic History
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”
Many buyers and sellers
Identical products
Perfect information
No transaction costs
Free entry and exit into the market
Adam Smith 9 8 10 7 13 12 11 5 1
End 2 3 14 4 6 16 26 25 27 28 30 29 24 23 18 17 19 20 22 21 15

8. Setting Output in Perfect Comp.
Maximize profits  MR = MC TC= Q2 P=$120 MC = 6Q, MR=120 6Q=120, Q=20 Revenue = $2400 Profits = 2400 – (2000+3(20)2)= -800 Stay open or shut down?

9. Monopolistic Competition
Monopoly
Perfect Competition
Differentiated product
Downward sloping demand
Many firms
No (low) barriers to entry
Intense competition between firms with slightly differentiated products.
Firms can use differentiation to price above marginal costs, but long run profits are low due to competition and copying.

10. Pizza Industry

11. Strategies for Monopolistic Comp.
Seek to achieve product differentiation or product superiority.
Try to create loyal consumers.
The less easily copied, the better.

12. Perfect Comp. & Monopolistic Comp.
In both cases, barriers to entry are low or non-existent.
As a result, economic profits will be low.
Product differentiation leads to some prospects for economic profits, especially to the extent that it can’t be copied.