Notesale: Turn your study into money

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Econ
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Pure Competition: thing that are interchangeable (small markets, ex:
agriculture)
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Monopolistic Competition: branding yourself (closer to pure
competition than monopoly, have a loyal customer base)
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• Many substitutes
• Many buyers and sellers, standardized products (all sell same products)
Pure Competition (Characteristics)

• large number of sellers, many substitutes
• standardized product, easy entry and exit into market
• perfectly elastic demand: firms produce as much or little as they want at
certain price

• demand graphs at a horizontal line
• “price takers:” no control over the price they sell the products for, take
what price market gives them
What is a barrier to market entry?
• Equipment and labor
• Low à easy to enter and exit market place
• High à hard to get into
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need to make product the best in the marketplace

Profit Maximation
TR & TC = approach
Approach ---- 3 Questions
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What quantity should this firm produce?
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The marginal cost of product is at $4 and market price is $4
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75
(this will maximize profit)
Profit Maximization in the Long-Run
• Worst for the long-run is to have 0 profits
• Easy entry and exit
• All costs are avoidable and variable
• A firm with a loss can exit the industry in the long-run
Zero-Profit Condition
o in competitive market there is nothing you can do to stop new firms from
starting
o this increases supply and lowers market price for everyone in market
when new firms join
Long-Run Equilibrium
-entry eliminates profit
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Supply increases
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Chapter 8: Pure Monopoly
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6/4/15 12:13 AM

Characteristics of a Pure Monopoly
Single seller: sole producer
No close substitutes: unique product
Price maker: only firm selling something with no competition therefore
has control over prices
Blocked Entry: strong barriers to entry block potential competition
Monopolies: (any firm with market power) will engage in price
discrimination
Price discrimination: based on what people are willing to pay, ex:
charging adult more for movie ticket than a student ticket

Examples of a Pure Monopoly
§ Public utility company à Natural gas, electric, water
§ Near monopolies à intel (computer chip), Wham-O (frisbee), De Beers
(Dutch diamond company in wholesale of whole diamond, owned mines in
South Africa)
Barriers to Entry
• Barrier to entry: a factor that keeps firms from entering the industry
• Economies of Scale: a natural monopoly, ATC (average total cost) gets
smaller as firm produces more and grows
• Legal barriers
o Patents and licenses (government makes)
o Pharmaceutical for drugs
o Copyrights on movies and songs
o U
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P
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(United States Postal Service) has first class right to carry
first class mail
• Ownership of essential resources
• Pricing (price so that new firms cannot compete and enter industry à
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they put rival at a disadvantage)
Network effects (demand side) once firm builds customer base, each
customer benefits from more customers joining
Ex: facebook (to join everyone else using it)
Monopoly Demand
Pure monopolist is the industry

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Looks at market demand to set prices
Demand curve is the market demand curve (can set price as high or low
as they want)
o Down sloping demand curve à when price is too high

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Monopolists face a trade off
o Charging high price = low sales (what price maximizes profits)
o Low price = high sales
Generally, monopolist will choose price above MC (or competitive price)
Price markup (high) whenever monopoly has high market power
Price markup (low) whenever monopoly has low market power
Will produce less quantity than competitive industry

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Ability to raise price above MC (market cost) depends on the market
power of the monopoly

Why do perfectly competitive firms have to sell at exactly MC?
• How elastic your customers are depends on the outside options they have
or substitutes
Misconceptions of Monopoly Pricing
• Not highest price
• Has the potential to have the highest price possible of all market
structures
• Monopoly = high price
• Purely competitive market = low price
• Oligopoly and monopolistic competition in middle
• Oligopoly à may have highest price but only if they are able to form a
cartel or collude (illegal)
o Ex: cartels formed to work together to make most money possible
Drug cartel: maintains high price together to not compete against
each other in price wars
OPEC: Organization of Petroleum Exporting Countries
International cartel

Econ

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