Chapter 5 Perfect Competition, Monopoly, and Economic vs Normal.pptVIP

Chapter 5Perfect Competition, Monopoly, and Economic vs. Normal Profit Chapter Outline From Perfect Competition to Monopoly Supply Under Perfect Competition You Are Here From Perfect Competition to Monopoly Perfect Competition Monopolistic Competition Oligopoly Monopoly Picking the Quantity to Maximize ProfitThe Perfectly Competitive Case Picking the Quantity to Maximize ProfitThe Monopoly Case Characteristics of Perfect Competition a large number of competitors, such that no one firm can influence the price the good a firm sells is indistinguishable from the ones its competitors sell firms have good sales and cost forecasts there is no legal or economic barrier to its entry into or exit from the market Monopoly The sole seller of a good or service. Some monopolies are generated because of legal rights (patents and copyrights). Some monopolies are utilities (gas, water, electricity etc.) that result from high fixed costs. Monopolistic Competition Monopolistic Competition: a situation in a market where there are many firms producing similar but not identical goods. Example : the fast-food industry. McDonald’s has a monopoly on the “Happy Meal” but has much competition in the market to feed kids burgers and fries. Oligopoly Oligopoly: a situation in a market where there are very few discernible competitors Examples Satellite TV service (Direct TV, Dish Network) Airlines (American, Delta etc.) Which Model Fits Reality? Perfect competition is rare outside agriculture though it fits some labor markets. Monopolies are common in utilities Major branded companies are typically either in oligopolistic or monopolistically competitive industries. Examples of Different Market Forms Distinguishing Characteristics Between Market Forms Concentration Ratios there is no magic line that separates oligopoly from monopolistic competition. a “concentration ratio” measures the percentage of total market sales for the top firms (from 4 firms to 100 firms). Concentration Ratios