Chapter 21

1. Pure Competition Chapter 21

2. Identical product As long as the price is the same, buyers don’t care which supplier they buy from--- perfect substitutes Ex- Agricultural products (rice and corn) Standardized Product

3. Product that differs slightly from competitors’ versions--- preferences exist Buyers are not indifferent about the seller when the price of the product is the same Ex- Shoes, dresses, retail Differentiated product

4. Economists group industries into 4 distinct market structures 1. Pure Monopoly 2. Oligopoly 3. Monopolistic Competition 4. Pure Competition Grouping

5. A market structure in which one firm is the sole seller of a product or service Entry of additional firms is blocked so one firm makes up the entire industry They make no effort to differentiate its product Ex- local utilities- no substitutes 1. Pure Monopoly

6. Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors EX- Water company, electric company, telephone (too expensive to build the networks for competitors) Natural Monopoly

7. Involves only a few sellers of a standardized (identical to competitors) or differentiated product Each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output Ex- Steel, automobiles, household appliances 2. Oligopoly

8. Relatively large number of sellers producing differentiated products (clothing, furniture, books) • Wide-spread non-price competition (product differentiation), a selling strategy in which one firm tries to distinguish its products or service from competitors on the basis of attributes such as design and craftsmanship • Ex- Retail stores, shoes 3. Monopolistic Competition

9. Very large number of firms producing a standardized product (corn) “Price Takers”- individual firms cannot change the market price, only react to changes Individuals are at the mercy of the market Ex- if market price is $2 why sell at $2.05 or $1.95? 4. Pure Competition

10. Combination of Pure Monopoly, Monopolistic Competition, and Oligopoly 3 grouped together are distinguished from Pure Competition Imperfect Competition

11. Demand schedule for individual firm in a purely competitive industry is perfectly elastic at the market price (only 1 price available) The firm cannot obtain a higher price by restricting output, nor should it lower prices to increase volume Perfectly Elastic Demand

12. Marginal Revenue , Demand, Average Revenue, and Price, are the same (MR. DARP) Total revenue increases by a constant (price) Total revenue curve is upward sloping with constant slope Pure Competition: Average, Total and Marginal Revenue

13. $1179 Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data 1048 917 786 ] ] ] ] ] ] ] ] ] ] 655 Price and Revenue 524 393 262 131 2 4 6 8 10 12 Quantity Demanded (Sold) Pure Competition TR P QD TR MR $131 131 131 131 131 131 131 131 131 131 131 0 1 2 3 4 5 6 7 8 9 10 $0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 131 131 131 131 131 131 131 131 MR = D = AR = P