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Economics: Perfect vs. Monopolistic Competition

The document discusses perfect competition and monopolistic competition. Under perfect competition, there are many small firms, homogeneous products, perfect information and mobility of resources. Firms are price-takers and maximize profits where marginal revenue equals marginal cost. In the long-run, all firms earn only normal profits. Monopolistic competition has many small differentiated firms, elastic demand, and non-price competition. In the short-run, firms may earn profits or losses but in the long-run will earn only normal profits as barriers to entry are low. Firms charge a higher price and produce less than under perfect competition.

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Minh Trag
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165 views7 pages

Economics: Perfect vs. Monopolistic Competition

The document discusses perfect competition and monopolistic competition. Under perfect competition, there are many small firms, homogeneous products, perfect information and mobility of resources. Firms are price-takers and maximize profits where marginal revenue equals marginal cost. In the long-run, all firms earn only normal profits. Monopolistic competition has many small differentiated firms, elastic demand, and non-price competition. In the short-run, firms may earn profits or losses but in the long-run will earn only normal profits as barriers to entry are low. Firms charge a higher price and produce less than under perfect competition.

Uploaded by

Minh Trag
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

PERFECT COMPETITION

1. Characteristics
- Large no. of buyers + sellers => producing more or less by 1 seller won’t affect price
- Price-takers => market price is taken, seller have no influence on price
- Homogeneous/ Identical products
- Low barrier to entry
- Perfect infor: price n quantity of products r assumed to be known to all consumers + producers
- Perfect mobility of production factor: L + K freely move among firms

2. Curve
- D curve for P taker: perfectly elastic, no influence on price
- D curve for P maker: downward sloping => lower price, sell more

3. Short-run

Total revenue TR=P × Q


Total cost TC=TFC +TVC
Profit π=TR−TC
TR P ×Q
Avg revenue AR= = =P
Q Q
ΔTR ∂ TR
Marginal revenue MR= =
ΔQ ∂Q
TFC
Avg fixed cost AFC=
Q
TVC
Avg variable cost AVC=
Q
TC
Avg total cost ATC= =AFC + AVC
Q
ΔTC ∂TC ∂TVC
Marginal cost MC= = =
ΔQ ∂Q ∂Q

a. Revenue & cost


- Price is constant => More Q = more revenue
 P=D= AR=MR

b. Profit max
- 2 conditions:
(1) MR = MC (TR slope = TC slope)
(2) MC cuts MR from below

c. Profit/ BE/ Loss

π=TR−TC=(P−ATC )×Q
=> π >0 when P> ATC

Profit

π=0 when P= ATC

Break-even/
Normal profit
π <0 when P< ATC

Loss

d. Short-run curve
- Assume:
(1) No firm enter/ exit
(2) Fixed costs are always incurred (sunk cost)
- Loss minimizing: When P< ATC , P<( AFC + AVC )
(1) If P< AVC , fixed costs may be covered partly
(2) If P< AFC , shut down
- MC curve at/ above shutdown point = SR supply curve for firm under perfect competition

Firm can only produce from


Q3 onwards/ Market price is
min at P3
(if P< P 3, shut down)

4. Long-run
- Assume:
(1) Firms can enter/ exit freely
(2) L and k move freely
- If market price at P0, firms make profits
=> new entrants
=> P0 -> P1 (price equilibrium is lower) till firms only make normal profit
- If market price at P3, firms make losses
=> exit of firms
=> P3 -> P1 (price equilibrium is higher) till firms only make normal profit

- Concl.: LR equilibrium = firms only make normal profit ( P=MR=MC =ATC )

5. Econ Efficiency
- Productive efficiency: producing at the least possible cost/ resources
- Allocative efficiency: producing goods most desired by the society (every g/s is produced up to the
point where the last unit gives a marginal benefit to consumers = MC )

=> Under perfect competition, firms achieve both allocative + productive efficiency
MONOPOLISTIC COMPETITION

1. Characteristics
- Low concentration:
+ Many small firms w small market share
+ No collusion => Firms have independent actions
- Differentiated products:
+ Similar but not homogeneous products
+ Ea firm has small market share
+ Downward sloping demand
- D highly elastic:
+ Differentiated but not unique => many substitutions
+ Elasticity depends on (1) no. of rivals, (2) degree of differentiation
- Non-price competition:
+ Quality, service
+ Location, promotion, package
- Ltd control over price
- Low barriers to entry:
+ Low economies of scale (cost advantages earned by scale of firm’s operation)
+ Low set-up cost
2. Output and Pricing decision
a. Short-run

Econ profit Loss minimization

b. Long-run
- Firms tends to make normal profit cuz
+ Low barrier to enter/ exit -> disappearance of econ profits/ losses in LR
+ Except firms find new ways of lowering production cost to maintain econ profits.
3. Econ effects
- Mono firm charge a higher price (Pmc) & produce smaller quantity (Qmc), compared to perfect
competitive industry (Pc, Qc)
- Profit max occurs at MR=MC
=> P> MC
Firm is not at the min point of ATC curve
- Consumer surplus get smaller in Mono, but consumers can buy goods differentiated & closely to
their tastes
a. Product differentiation

Advtg. Disadvtg.
- More choice - Too much choice
- Innovation = better products - Superficial product changes => waste of
- Avoid P war resources

b. Marketing

4. Perfect vs. Mono

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