1. Perfect Competition and Monopoly1

2. Perfect Competition and Monopoly
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 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. 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 2

12. Perfect Competition and Monopoly

13. Perfect competition Assumptions Short-run equilibrium of the firm
firms are price takers
freedom of entry
identical products
perfect knowledge
Short-run equilibrium of the firm
P = MC
possible supernormal profits 4

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

15. Perfect competition Assumptions Short-run equilibrium of the firm
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 4

16. Loss minimising under perfect competition
Loss is minimised where MC = MR. AC MC P S AC
D1 = AR1
= MR1
AR1 Qe P1 D O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

17. Perfect competition Assumptions Short-run equilibrium of the firm
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 4

18. Deriving the short-run supply curveMC D1
= S D2 a
D1 = MR1 D3 P1 b
D2 = MR2 P2 c
D3 = MR3 P3 O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

19. Perfect competition Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away 5

20. 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

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

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 5

23. S1 S2 b a c D2 D1 (a) Constant industry costs
Various long-run industry supply curves under perfect competition P S1 S2 D2 b a c
Long-run S D1 O Q
(a) Constant industry costs

24. Various long-run industry supply curves under perfect competitionb D2
Long-run S c a D1 O Q
(b) Increasing industry costs: external diseconomies of scale

25. Various long-run industry supply curves under perfect competitionb a
Long-run S c D1 O Q
(c) Decreasing industry costs: external economies of scale

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 5

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 6

28. Perfect competition Disadvantages of perfect competition
insufficient profits for investment
lack of product variety
lack of competition over product design and specification 7

29. Perfect Competition and Monopoly

30. Monopoly Defining monopoly Barriers to entry Natural monopoly
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 8

31. Natural monopoly a b LRAC D1 D2 £ O Q
A monopoly can make supernormal profits between a and b.
LRAC D1 D2
Two firms sharing the market will both make less than normal profit. O Q

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

33. Average and marginal revenue under monopolyAR MR O Q

34. Monopoly The monopolist's demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
output where MC = MR 8

35. Profit maximising under monopolyMC
Profit maximised at output of Qm (where MC = MR) MR O Qm Q

36. Monopoly The monopolist's demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
output where MC = MR
price given by demand (AR) curve 8

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

38. Monopoly The monopolist's demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
output where MC = MR
price given by demand (AR) curve
Limit pricing 8

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

40. Monopoly Disadvantages of monopoly high prices / low output: short run9

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

42. 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

43. Monopoly Disadvantages of monopoly Advantages 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 9

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

45. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MC ( = supply)perfect competition
MCmonopoly P2
Higher price (P2) under perfect competition P1 x
… as long as MCmonopoly is below point x
AR = D MR O Q2 Q1 Q

46. Monopoly could produce at even lower price by producing where MC = P.
Equilibrium of industry under perfect competition and monopoly: with different MC curves
MC ( = supply)perfect competition
MCmonopoly P2
Monopoly could produce at even lower price by producing where MC = P. P1 x P3
AR = D MR O Q2 Q1 Q3 Q

47. Monopoly Disadvantages of monopoly Advantages 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 9

48. Perfect Competition and Monopoly
Contestable Markets

49. Contestable markets Importance of potential competition
low entry costs
low exit costs
Perfectly contestable markets 11

50. A contestable monopolya P1
LRAC
D = AR Q1 O Q

51. A contestable monopoly
Supernormal profit a P1
LRAC b
AC1
D = AR Q1 O Q

52. A contestable monopoly
The threat of entry drives price down to P2. a P1
LRAC b
AC1 c
P2 =AC2
D = AR Q1 Q2 O Q

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 11