2021

MICROECONOMICS

PERFECT COMPETITION,
MONOPOLY, AND OLIGOPOLY
MARKET

JIHAN LATIFAH / 2001101010160

 2021

PERFECT

COMPETITION

01 Microeconomic
Factors that Shape the Competitive
Environment

Product Differentiation
Product Differentiation
Production Methods
Economies of scale can preclude small-firm size.
Entry and Exit Conditions
Barriers to entry and exit can shelter
incumbents from potential entrants.
Buyer Power
Powerful buyers can limit seller power.
 Market structures

THE FIRM IN COMPETITIVE MARKETS NON-PERFECT COMPETITION

PERFECT COMPETITION MONOPOLY

OLIGOPOLY

MONOPOLISTIC COMPETITION
PERFECT
COMPETITION
Meaning of Perfect Competition Market
" A Market situation in which a large number of
producers or sellers producing and selling
homogeneous product."
 “ PERFECT COMPETITION ”

COMPETITIVE MARKETS

Profit maximizer
Identical product
A very small share of the market
Price-taker
Produces a homogeneous product
Perfect information
No barriers to entry (legal, technological, or resource)
No technical progress
No investment lag (Immediate implementation of
production decisions)
Homogeneous goals of the owners and managerial staff
Examples of Competitive Markets

Agricultural commodities.
Some prominent markets for intermediate goods and services.
Unskilled labor market.
Profit Maximization Imperative

Normal profit is return necessary to attract and

maintain capital investment.
Efficient firms can earn normal profit.
Inefficient firms suffer losses.

Role of Marginal Analysis

Set Mπ = MR – MC = 0 to maximize profits.

MR=MC when profits are maximized.
 2021

Monopoly

MONOPOLY
02 Microecnomic
One firm in industry

Basic
Profit-maximiser
Faces market demand curve
One product
No close substitutes
Price-maker
No restrictions on resources
Properties
Blockaded entry and/or exit Examples of Monopoly
Imperfect dissemination of information
Electricity utilities
Opportunity for economic profits in long-run equilibrium Gas
Water
Public Tramsport
Telecommunications
 Social Benefits From Monopoly

•Economies of Scale

Monopoly is sometimes the natural result of vigorous competitive forces.

In natural monopoly, LRAC declines continuously and one firm is most efficient.
Some real-world monopolies are government-created or government-maintained.

•Invention and Innovation

Public policy sometimes confers explicit monopoly rights to spur productivity.

MONOPOLY
REGULATION
DILEMMA OF NATURAL MONOPOLY
Monopoly has the potential for efficiency.
Unregulated monopoly can lead to economic
profits and underproduction.

MONOPOLISTS PRODUCE LESS, PRICE

HIGHER THAN FIRMS IN COMPETITIVE
EQUILIBRIUM
Sources of
monopoly power
• Natural monopoly (public utilities best example, railway tracks), economies of scale,

• Capital requirements on production or big sunk costs on entry

• Patents (17 years), trade secrets (Coke)
• Exclusive or unique assets (minerals, talent)
• Locational advantage (popcorn shop in cinema – but in general you pay rent for these advantages)
• Regulation (TV, taxi, telephone in the past)
• Collusion by competitors

Monopsony
Oligopsony exists when there are only a handful of buyers. Monopsony exists if there is only one buyer.
Buyer power can be used to obtain less than competitive market prices.
 Oligipoly

Microeconomic
04
OLIGOPOLY MARKET
CHARACTERISTICS
• Few sellers.
• Homogenous or unique products.
• Blockaded entry and exit.
• Imperfect dissemination of information.
• Opportunity for above-normal (economic) profits in long-run equilibrium.

EXAMPLES OF OLIGOPOLY
• National markets for aluminum, cigarettes, electrical equipment, filmed entertainment, ready-to-eat cereals, etc.
• Local retail markets for gasoline, food, specialized services, etc.
Overt and Covert Agreements

Cartels operate under formal agreements.

Powerful cartels function as a monopoly.
Collusion exists when firms reach secret, covert
agreements.

Enforcement Problem

Cartels are typically rather short-lived because

coordination problems often lead to cheating.
Cartel subversion can be extremely profitable.
Detecting the source of secret price concessions can be
extremely difficult.
Oligopoly Output-Setting Models

Cournot Oligopoly
Cournot equilibrium output
is found by simultaneously
solving output-reaction
curves for both competitors.
Cournot equilibrium output
exceeds monopoly output
but is less than competitive
output.
 H N K

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A PRESENTATION BY: JIHAN LATIFAH