AGENDA Mon 3/6

• Business Plan/Stock Investment Projects• CH 7: Market Orgs 1 & 2• Perfect Competition• Monopolies• HW: pg 176 #1-5; pg 184 #1-5

• Econ Project #2 Planning DUE: 3/20• Final Project selection (MAD or Stocks) by 3/13

Chapter 7: Perfect Competition

Characteristics of Perfect Competition

• Many buyers and sellers.• All firms sell identical goods.• Buyers and sellers have all

relevant information about prices, product quality, and sources of supply.

• There is easy entry into the market and easy exit out of the market.

Perfect Competition

• A market may not satisfy one or more of the four conditions and still be perfectly competitive

• What determines whether a market is perfectly competitive or not is if firms (sellers) in the market are price takers.

Price Takers• A price taker is a seller

that can only sell its output at equilibrium price.

• A firm produces Q at which MR = MC at E (equilibrium price)

• Price takers will not sell for less than equilibrium.

What does a perfectly competitive firm do?

• It produces where marginal revenue equals marginal cost.

• MR = MC• It must sell its product

at equilibrium since it is a price taker.

Profit in a perfectly competitive market

• Profit acts as a signal to firms not in the market to enter the market.

• As new firms enter the market, they increase the supply of the good that is earning profit, and thus lower its price.

Chapter 7.2: Monopoly

Characteristics of monopoly• There is one seller.• Sells a product for which

there is no close substitutes.• Extremely high barriers to

entry into the market.

Barriers to Entry• Legal Barriers

• public franchise: ex cable TV• patent: 20 year exclusive rights to manufacture• copyright: intellectual rights of authors, artists

• Extremely low per-unit costs• so low that it keeps competition away• natural monopoly

• Exclusive ownership of scarce resource• A monopoly seller is not guaranteed profits.

• Price is limited by the demand curve for the product.

Government & Market Monopolies• government monopolies refer to monopolies that are

legally protected from competition

• market monopolies refers to monopolies that are not legally protected from competition

• natural monopolies exists when there is only one seller due to low average total cost.

• The monopoly firm is a price searcher.

• The price searcher can choose from various prices.

• The monopoly firm will produce where MR=MC.

• Will charge the highest possible price that it can sell all its output.

• Searches for the best price through trial and error.