CH 08
CH 08
CH 08
Less Competitive
Perfect Competition
Monopolistic
Competition
Oligopoly
Monopoly
o C er o M
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
Monopolistic Competition
• Many sellers and buyers
• Differentiated product
• Perfect mobility of resources
• Example: Fast-food outlets
Oligopoly
• Few sellers and many buyers
• Product may be homogeneous or
differentiated
• Barriers to resource mobility
• Example: Automobile manufacturers
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
Perfect Competition:
Price Determination
Perfect Competition:
Price Determination
QD = 625 − 5 P QD = QS QS = 175 + 5 P
625 − 5 P = 175 + 5 P
450 = 10P
P = $45
QD = 625 − 5P = 625 − 5(45) = 400
QS = 175 + 5P = 175 + 5(45) = 400
Perfect Competition:
Short-Run Equilibrium
Firm’s Demand Curve = Market Price
= Marginal Revenue
Economic Profit = 0
Perfect Competition:
Long-Run Equilibrium
Competition in the
Global Economy
Domestic Supply
World Supply
Domestic Demand
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
Competition in the
Global Economy
/€
R = Exchange Rate = Dollar Price of Euros
€
Supply of Euros
€
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
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
Monopoly
Short-Run Equilibrium
Q* = 500
P* = $11
Monopoly
Long-Run Equilibrium
Q* = 700
P* = $9
Social Cost of Monopoly
Monopolistic Competition