Topic10 - Imperfect competition Perfect competition 10....

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1 10. Monopoly Imperfect competition ± Perfect competition ² Firms have no control over price. ² Firms produce homogenous products. ² Price equals the marginal cost of production. ² Long-run economic profits are not possible due to free entry and exit. ² An ideal market that maximises economic surplus. ² A situation that does not always exist. Imperfect competition ± Imperfectly competitive firms ² Have some control over price. ² Price may be greater than the cost of production. ² Long-run economic profits are possible. ² Face a downward-sloping demand curve. ² Contribute to loss of efficiency. ² Are very common in every economy. ² Reduce economic surplus to varying degrees by restricting output. Imperfect competition ± Different forms of imperfect competition ² Pure monopoly ² Oligopoly ² Monopolistic competition Imperfect competition ± Various forms of imperfect competition ² Pure monopoly (most inefficient) ³ The only supplier of a unique product with no close substitutes, examples City power provider Only petrol station in a small town AFL football league Imperfect competition ± Various forms of imperfect competition ² Oligopoly (more efficient than a monopoly) ³ A firm that produces a product for which only a few rival firms produce close substitutes, examples Major banks in Australia BP, Shell, Mobil Airlines
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2 Imperfect competition ± Different forms of imperfect competition ² Monopolistic competition (closest to perfect competition) ³ A large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another, examples Restaurants in Lygon Street Novels, films, CDs Imperfect competition ± The essential difference between perfectly and imperfectly competitive firms comes from possible substitutability of products ² The perfectly competitive firm faces a perfectly elastic demand for its product. ² The imperfectly competitive firm faces a downward-sloping demand curve. Imperfect competition ± In perfect competition ² Supply and demand determine equilibrium price. The firm has no market power . ² At the equilibrium price, the firm sells all it wishes. Imperfect competition ± With perfect competition ² The firm won’t raises its price, since sales will be zero. ² The firm won’t lower its price, since it can sell what it likes at the market price. ² The firm’s demand curve is the horizontal line at the market price. Imperfect competition ± With imperfect competition ² The firm has some control over price or some market power . ² The firm faces a downward-sloping demand curve. ² In the case of a monopoly, the firm’s demand curve is the market demand curve. The demand curves facing perfectly and imperfectly competitive firms Quantity D Market price price Quantity D Perfectly competitive firm Imperfectly competitive firm
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3 Four sources of market power ± Exclusive control over inputs ² A singer with gifted talent ± Government-created monopolies ²
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This note was uploaded on 08/29/2011 for the course ECON 1101 taught by Professor Janegoley during the Three '08 term at Australian National University.

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Topic10 - Imperfect competition Perfect competition 10....

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