1. Market Structure: Perfect Competition, Monopoly and Monopolistic Competition

2. Monopolistic Competition
Market Structure
More Competitive
Less Competitive
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

3. 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

4. Monopolistic Competition
Many sellers and buyers
Differentiated product
Perfect mobility of resources
Example: Fast-food outlets

5. Oligopoly Few sellers and many buyers
Product may be homogeneous or differentiated
Barriers to resource mobility
Example: Automobile manufacturers

6. 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

7. Perfect Competition: Price Determination

8. Perfect Competition: Price Determination

9. 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

10. Perfect Competition: Short-Run Equilibrium

11. 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

12. Perfect Competition: Long-Run Equilibrium

13. Competition in the Global Economy
Domestic Supply
World Supply
Domestic Demand

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

15. Competition in the Global Economy/€
R = Exchange Rate = Dollar Price of Euros €
Supply of Euros
Demand for Euros € €

16. 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

17. 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 (MR)
Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output

18. Monopoly Short-Run Equilibrium

19. Monopoly Long-Run Equilibrium

20. Social Cost of Monopoly

21. 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

22. Monopolistic Competition Short-Run Equilibrium

23. Monopolistic Competition Long-Run Equilibrium
Profit = 0

24. Monopolistic Competition Long-Run Equilibrium
Cost with selling expenses
Cost without selling expenses

25. Oligopoly Few sellers of a product Nonprice competition
Barriers to entry
Duopoly - Two sellers
Pure oligopoly - Homogeneous product
Differentiated oligopoly - Differentiated product

26. Sources of Oligopoly Economies of scale
Large capital investment required
Patented production processes
Brand loyalty
Control of a raw material or resource
Government franchise
Limit pricing

27. Kinked Demand Curve Model
Proposed by Paul Sweezy
If an oligopolist raises price, other firms will not follow, so demand will be elastic
If an oligopolist lowers price, other firms will follow, so demand will be inelastic
Implication is that demand curve will be kinked, MR will have a discontinuity, and oligopolists will not change price when marginal cost changes

28. Kinked Demand Curve Model