Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html

Perfect Competition and Monopoly

Market Structure

Perfect Competition – Assumptions

Large number of buyers and sellers

Product Homogeneity

o Price takers

Free entry and exit of firms

Goal of all firms is to maximize profit

No government regulations

The market structure in which above assumptions are fulfilled is called pure competition.

Additional Assumptions

Perfect mobility of factors of production

o Workers can move between different jobs

o Factors not owned by one party

o Labor is not unionized

Perfect knowledge

In below table,

𝑇𝑅 (𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑄𝑥𝑃

𝐴𝑅 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =𝑇𝑅

𝑄

𝑀𝑅 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =∆𝑇𝑅

∆𝑄

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html

Short Run Equilibrium of the firm

There are two approaches for determine the profit maximization equilibrium

1. Total approach

2. Marginal approach

At that max gap,

profit maximizes.

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html

Short Run Equilibrium of the firm

Example: Use Knowledge from above graph and lecture.

Long Run Equilibrium of the firm

Earning just normal profits

If the firm makes losses in the long run they will leave the industry

LMC = LAC = P = MR

Monopoly

Single seller

No close substitute

Barriers to entry

Price maker

Absence of competition

Inelastic demand curve

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html

The main causes that lead to monopoly are the followings,

Ownership of strategic raw materials or exclusive knowledge of production techniques.

Patent rights for a product or for a production process

Government licensing or the imposition of foreign trade barriers to exclude foreign

competitors.

Natural Monopoly (size of the market do not allow multiple sellers)

Pricing policy, heavy advertising or continuous product different ion.

Example - Monopoly – short run equilibrium

Price Discrimination

Same product is sold at different prices to different buyers.

The product and cost are basically same. But it may have slight differences.

Ex. Different location of seats in a theatre

Necessary conditions, which must be fulfilled for the implementation of price discrimination

the market must be divided in to sub-markets with different price elasticities

There must be effective separation of the sub - markets