PC and Monopoly Lesson

Perfect Competition & Monopoly

By Shannon Lane

• Describe examples of barriers to entry

  Illustrate and explain how a monopoly determines its price and output

• Explain why a monopoly firm can make economic profits in the short run and the long run

Monopoly

• Review last lesson

• Illustrate and explain why firms in perfect competition can only make economic profits in the short run

Perfect Competition

Today's Content

Multiple Choice

Price for a perfectly competitive firm is determined by

• Government regulations
• Market supply and demand
• Firm's production costs
• Consumer preferences

Draw

Draw the MR, AR. P, D

Draw

Show the profit maximising quantity

Multiple Choice

The profit maxmising point is

• where fixed costs are highest
• where average cost equals average revenue
• where total cost is minimized
• where marginal cost equals marginal revenue

In a perfectly competitive market, firms can only make economic profit in the short run. In the long run price will fall due to increased supply

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Profit in Perfect Competition

Multiple Choice

This firm is making an economic loss.

• True

• False

Multiple Choice

This diagram shows perfect competition in the long run.

• False

• True

Multiple Choice

This diagram shows perfect competition in the long run.

• True

• False

Monopoly Characteristics

• a single seller in the market (there are no other firms competing);

• a unique product (there are no close substitutes); and

• high barriers to entry (factors that make it difficult or impossible for other firms to enter the market).

Barriers to Entry

• Ownership of a vital resource e.g. land

• Legal barriers such as licences, patents and copyright

• Financial barriers such as high start-up costs

Monopoly Price Power

• The MR curve lies below the demand curve for a monopoly firm.

• MR decreases as quantity increases due to the fact that total revenue is increasing at a decreasing rate.

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MR Curve in Monopolies

• We assume the monopoly firm wants to maximise profit so will choose to produce a level of output where MC = MR.

• Since the monopoly firm has chosen its optimal level of output, it can now choose the maximum price it can charge in order to sell that quantity of output.  This price can be seem from the demand curve. 

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Price and Output

Draw

Draw a monopoly firm diagram with the following curves: MC, AC, MR, AR/D