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Perfect Competition vs. Monopoly - PowerPoint PPT Presentation

Perfect Competition vs. Monopoly. Microeconomics – Dr. D. Foster. How are they the same?. Profit maximizing. Same rule for profit maximizing. Cost structures. Calculate their economic profit as TR-TC. How are they different?. Monopoly. Perfect Competition. Only 1 firm. Entry barriers.

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PerfectCompetitionvs.Monopoly

Microeconomics – Dr. D. Foster

• Profit maximizing.

• Same rule for profit maximizing.

• Cost structures.

• Calculate their economic profit as TR-TC.

Monopoly

Perfect Competition

• Only 1 firm.

• Entry barriers.

• Mkt D = firm demand

• May earn LR econ profits.

• Allocatively inefficient

• Likely prod. inefficient

• Many firms.

• No entry barriers.

• Mkt D  firm demand

• Cannot earn LR econ profits.

• Allocatively efficient

• LR – prod. efficient

S

S*

Pe

D

Q

Qe

The Market

Perfect Competition

\$

MC

ATC

Pe*

MR* = d*

Pe

MR = d

q*

q

q*

A Firm

The market determines the equilibrium price.

Market supply increases and the market price falls.

For the firm, price = demand = MR.

LR equilibrium – firm earns 0 economic profit; is allocatively and productively efficient.

For the firm, find ATC to determine profit.

With a positive economic profit, firms enter.

Monopoly

Price

The firm = the market

MC

The firm must find MR.

P*

Find MC to determine Q*.

Price off the demand.

Find ATC to determine the firm’s economic profit.

Demand

Without entry, this persists in the long run.

Quantity

Q*

In LR – firm is allocatively and productively inefficient.

MR

PerfectCompetitionvs.Monopoly

Microeconomics – Dr. D. Foster