Download Micro ch 21- presentation 1 Market Structures

Pure Competition
CHAPTER 21
STANDARDIZED PRODUCT
Identical product
 As long as the price is the same, buyers don’t
care which supplier they buy from--- perfect
substitutes
 Ex- Agricultural products (rice and corn)

DIFFERENTIATED PRODUCT
Product that differs slightly from competitors’
versions--- preferences exist
 Buyers are not indifferent about the seller
when the price of the product is the same
 Ex- Shoes, dresses, retail

GROUPING
Economists group industries into 4 distinct
market structures
 1. Pure Monopoly
 2. Oligopoly
 3. Monopolistic Competition
 4. Pure Competition

1. PURE MONOPOLY
A market structure in which one firm is the sole
seller of a product or service
 Entry of additional firms is blocked so one firm
makes up the entire industry
 They make no effort to differentiate its product
 Ex- local utilities- no substitutes

NATURAL MONOPOLY
Natural monopolies arise where the
largest supplier in an industry, often the
first supplier in a market, has an
overwhelming cost advantage over other
actual or potential competitors
 EX- Water company, electric company,
telephone (too expensive to build the
networks for competitors)

2. OLIGOPOLY
Involves only a few sellers of a standardized
(identical to competitors) or differentiated
product
 Each firm is affected by the decisions of its
rivals and must take those decisions into
account in determining its own price and
output
 Ex- Steel, automobiles, household appliances

3. MONOPOLISTIC COMPETITION
•
•
•
Relatively large number of sellers producing
differentiated products (clothing, furniture,
books)
Wide-spread non-price competition (product
differentiation), a selling strategy in which one
firm tries to distinguish its products or service
from competitors on the basis of attributes
such as design and craftsmanship
Ex- Retail stores, shoes
4. PURE COMPETITION
Very large number of firms producing a
standardized product (corn)
 “Price Takers”- individual firms cannot change
the market price, only react to changes
 Individuals are at the mercy of the market
 Ex- if market price is $2 why sell at $2.05 or
$1.95?

IMPERFECT COMPETITION
Combination of Pure Monopoly, Monopolistic
Competition, and Oligopoly
 3 grouped together are distinguished from Pure
Competition

PERFECTLY ELASTIC DEMAND
Demand schedule for individual firm in a purely
competitive industry is perfectly elastic at the
market price (only 1 price available)
 The firm cannot obtain a higher price by
restricting output, nor should it lower prices to
increase volume

PURE COMPETITION: AVERAGE, TOTAL AND
MARGINAL REVENUE
Marginal Revenue , Demand, Average Revenue,
and Price, are the same (MR. DARP)
 Total revenue increases by a constant (price)
 Total revenue curve is upward sloping with
constant slope

Pure Competition
$1179
P
$131
131
131
131
131
131
131
131
131
131
131
Firm’s
Revenue
Data
TR
1048
917
QD
TR
0
1
2
3
4
5
6
7
8
9
10
$0
131
262
393
524
655
786
917
1048
1179
1310
MR
]
]
]
]
]
]
]
]
]
]
$131
131
131
131
131
131
131
131
131
131
Price and Revenue
Firm’s
Demand
Schedule
(Average
Revenue)
786
655
524
393
262
MR = D = AR = P
131
2
4
6
8
Quantity Demanded (Sold)
10
12