perfect competition and monopoly

Question 1

What are the assumption for perfect competition

Answer 1

Many small buyers and sellers

– Homogenous product

– Perfect Information

– No transactions costs

– Free entry and exit in the long run (the number of firms in the industry is fixed in the short run)

Question 2

Explain the demand curve for perfect competition

Answer 2

A perfectly competitive firm is a pricetaker, meaning it cannot influence the price of the product it sells and that it can sell as many units as it wants at the prevailing market price, p.

• It therefore faces a perfectly elastic demand curve for its own output
• Since a firm’s total revenue from selling q units is:

TR = pq It follows that:

AR = p MR = p

Hence the firm’s demand curve is also its AR and MR curve

Question 3

explain PC in short run

Answer 3

Question 4

Explain PC in short run

Answer 4

Question 5

Explain dymanics of PC in short and long run

Answer 5

Question 6

Explain Monopoly assumptions

Answer 6

No close substitutes

– Barriers to entry into the market:

• Economies of scale (leading to natural monopolies)
• Control over raw materials
• Patents or copyright for products or processes
• High levels of sunk costs
• Market franchises
• Legal barriers

note Lr=SR as no new companies entering

Question 7

What is monopoly demand curve?

Answer 7

Since the firm is the market, a monopolist faces the (usually downwards sloping) market demand curve

• A monopolist therefore has ‘market power’, in the sense that it is able to influence the market price (compare with the perfectly competitive firm)
• The monopolist can be thought of as choosing quantity (or price)

Question 8

What are the Key features of equilibrium in monopoly

Answer 8

Key features of equilibrium (both SR and LR):

P not equal to MC

• Lower output, higher prices compared to competitive market, meaning that firms gain at the expense of consumers
• Allocatively inefficient – there is a ‘deadweight loss’  P> AC
• Positive profits (exploiting consumers or rewarding entrepreneurship?

Source of necessary funds for innovation?)

Not technically efficient (not operating at MES)

Question 9

What determines market structure?

Answer 9

Technology (costs) and the scale of the market (demand) play a key role in determining the long term structure of an industry:

A: If demand is large relative to the MES, likelihood of relatively competitive market

B: If demand is small relative to the MES, likelihood of relatively monopolistic market