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Unit 4- Managing in competitive,

monopolistic and
monopolistically competitive
markets.
PERFECT COMPETITION
many buyers and seller with little power over price

homogeneous products

perfect information

no transaction costs

free entry and exit

a single market price is set

firms earn 0 economic profit in the long run

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 1

 Demand is a horizontal line at the market price.

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 2

 In order to maximise profits, the firm must produce : (when marginal costs are
increasing and provided that P> AVC)

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 3

 The more firms there are, the higher the supply and lower the price.

In the long run, perfect competitive firms produce so that:

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 4

 MONOPOLIES
A monopoly is a markey structure where one single firm serves the whole market

market demand curve is firm demand curve

no unlimited market power

Sources of monopoly power:

1. econonomies of scale

2. economies of scope

a. total cost of producing two products together is smaller than producing the,
separately

3. cost complementary

a. marginal cost of producing one product decreases when output of another

increases

4. patents and legal barrierw

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 5

 PROFIT MAXIMISATION IN A MONOPOLY:

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 6

 A monopolist determines the supply of the market based on MR < P so a change in
Q will change P

No supply curve

Monopolists benefit from barriers to entry and gains eocnomic profits..

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 7

 Deadweight loss of a monopoly: consumer and producer surplus lost due to P >>>
MC

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 8

 There are natural monopolies and they should be regulated

MONOPOLISTIC COMPETITION
many buyers and sellers

differenciated products

many substitutes and therefore demand curve is downwards

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 9

 free entry and exit

Unit 4- Managing in competitive, monopolistic and monopolistically competitive markets. 10