Perfect competition and pure monopoly Summary Flashcards
In a competitive industry each buyer and seller is a ..
price-taker, believing individual actions have no effect on the market price. Competitive supply is most plausible when many firms make a standard product, with free entry and exit, and easy verification by buyers that the products of different firms really are the same.
For a competitive firm, the price is..
its marginal revenue. Output equates price to marginal cost. The firm’s supply curve is its SMC curve above SAVC. At a lower price, the firm temporarily shuts down. In the long run, the firm’s supply curve is its LMC curve above its LAC curve. At a lower price, the firm eventually exits the industry.
Adding at each price the quantities supplied by each firm, we obtain the..
industry supply curve. It is flatter in the long run both because each firm can fully adjust all factors and because the number of firms in the industry can vary.
In the extreme case where all potential and existing firms have identical costs, the long-run industry supply curve is..
horizontal at the price corresponding to the lowest point on each firm’s LAC curve.
An increase in demand leads to a ..
large price increase but only a small increase in quantity. The existing firms move up their steep SMC curves. Price exceeds average costs and the ensuing profits attract new entrants. In the long run output increases still further but the price falls back. In the long-run equilibrium the marginal firm makes only normal profits and there is no further change in the number of firms in the industry.
An increase in costs for all firms reduces the industry’s..
output and increases the price. In the long run the marginal firm must break even. A higher price is required to match the increase in its average costs.
Markets for the same good in different countries will be closely linked if ..
transport costs are small and there are no trade restrictions. In a competitive world market each country takes the world price of the commodity as given. Discrepancies between domestic supply and domestic demand are met through imports or exports. Foreign trade transmits foreign shocks to the domestic economy but acts as a shock absorber for domestic shocks.
A pure monopoly is the ..
only seller or potential seller of a good and need not worry about entry even in the long run. Though rare in practice, this case offers an important benchmark against which to compare less extreme forms of monopoly power.
A profit-maximizing monopolist has a supply rule…
– choose output to set MC equal to MR – but not a supply curve uniquely relating price and output. The relation of price and MR depends on the demand curve.
Where a monopoly and a competitive industry can meaningfully be compared..
the monopolist produces a smaller output at a higher price. However, natural monopolies with large economies of scale could not exist as competitive industries.
A discriminating monopolist ..
charges different prices to different customers. To equate the marginal revenue from different groups, groups with an inelastic demand must pay a higher price. Successful price discrimination requires that customers cannot trade the product among themselves.
Monopolies may have more ..
internal resources available for research and may have a higher incentive for cost-saving research because the profits from technical advances will not be eroded by entry. Although small firms do not undertake much expensive research, it appears that the patent laws provide adequate incentives for medium- and larger-sized firms. There is no evidence that an industry has to be a monopoly to undertake cost-saving research
