A COMPARISON OF PERFECT COMPETITION, MONOPOLISTIC COMPETITION, MONOPOLY, & OLIGOPOLY

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1 A COMARISON OF ERFECT COMETITION, MONOOLISTIC COMETITION, MONOOLY, & OLIGOOLY Type of Number of Type of Market Sellers roduct rice SR profit LR rofit perfect equal pos., neg., competition many identical to or zero zero monopolistic greater pos., neg., competition many differentiated than or zero zero greater pos., neg., pos. or monopoly one than or zero zero oligopoly few identical or greater pos., neg., pos. or differentiated than or zero zero

2 ERFECT COMETITION, MONOOLY, MONOOLISTIC COMETITION, AN OLIGOOLY: GRAHING TIS (1) For all firms, the curve must intersect the at the minimum of the curve. (2) When a firm is making positive profits, the curve must lie at least partially below the demand curve. (3) When a firm is making negative profits (losses), the curve must lie entirely above the demand curve. (4) When a firm is making zero profits (breaking even), the curve must be tangent to the demand curve. (5) For perfect competition, the firm s demand curve must be horizontal and the same as the curve. (6) For monopolistic and monopolistically competitive firms, the firm s demand curve slopes down to the right. Theoretically, the monopolistic firm has a steeper demand curve than the monopolis-tically competitive firm. For both the monopolistic and monopolistically competitive firms, the curve is twice as steep as the demand curve (if the demand curve is a straight line). (7) When a perfectly competitive firm is making zero profits, the curve is tangent to the demand curve at the minimum of the curve. (8) When the monopolistic or monopolistically competitive firm is making zero profits, the curve is tangent to the demand curve at an output level that is lower than the output at the minimum of the curve. The tangency must be directly above the intersection of the and curves.

3 (9) When the oligopolist (in the kinked demand curve model) is making zero profits, the curve is tangent to the demand curve at the kink in the demand curve. This occurs at an output level that is lower than the output at the minimum of the curve. The tangency must be directly above the intersection of the and curves. (10) For the oligopolist (in the kinked demand curve model), the cost curve intersects the curve in the vertical segment of the curve. Each of the downward-sloping segments of the curve is twice as steep as the corresponding section of the demand curve (if the demand curve segments are straight lines). erfectly Competitive Firm making ositive rofits (SR only): * = *

4 erfectly Competitive Firm making Negative rofit (SR only): * * = erfectly Competitive Firm making Zero rofits (SR or LR): *=* =

5 Monopoly Firm making ositive rofits (SR or LR): * * Monopoly Firm making Negative rofit (SR only): * *

6 Monopoly Firm making Zero rofits (SR or LR): *=* Monopolistically Competitive Firm making ositive rofits (SR only): * *

7 Monopolistically Competitive Firm making Negative rofit (SR only): * * Monopolistically Competitive Firm making Zero rofits (SR or LR): *=*

8 Oligopoly Firm (Kinked emand Curve Model) making ositive rofits (SR or LR): * * Oligopoly Firm (Kinked emand Curve Model) making Negative rofit (SR only): * *

9 Oligopoly Firm (Kinked emand Curve Model) making Zero rofits (SR or LR): *=*

10 SOME TERMS AN EFINITIONS term definition formula notes price elasticity percentage change in qty % Q d /% after Q - before Q of demand demanded that results from % Q d = a 1% change in product price average Q (similarly for % ) price elasticity percentage change in qty % Q s /% of supply supplied that results from a 1% change in product price income elasticity percentage change in qty % Q d /% Inc of demand demanded that results from a 1% change in income cross elasticity percentage change in qty % Q x /% y of demand demanded of good X that results from a 1% change in price of product Y marginal utility the addition to utility that MU = TU/ Q results from consuming one more unit of a good average utility the utility per unit of a AU = TU/Q good marginal revenue the addition to revenue that = TR/ Q If a firm is perf comp results from producing one in product mkt, more unit of a good = price of product

11 term definition formula notes marginal cost the addition to cost that = TC/ Q results from producing one more unit of a good average fixed the fixed cost per unit of a AFC = TFC/Q cost good average variable the variable cost per unit AVC = TVC/Q cost of a good average total the total cost per unit of = TC/Q = AFC + AVC cost a good four-firm concen- the sum of the shares of the CR = s 1 +s 2 +s 3 +s 4 tration ratio 4 largest firms in the industry Herfindahl index the sum of the squares of the H = s 2 1 +s s n shares of all firms in the industry monopoly H=10,000 marginal physical the additional output that M = Q/ L product results from hiring one more unit of an input marginal revenue the additional revenue that = TR/ L=()(M) product results from hiring one more unit of an input

12 term definition formula notes marginal resource the additional cost that C = TC/ L cost results from hiring one more unit of an input value of the the additional output from VM = ()(M) If firm is perf comp marginal product hiring one more unit of an in product mkt, input multiplied by the = VM price of the output real interest rate of interest adjusted real i = money i rate for inflation minus infl rate present value current value of income V = R t /(1+i) t (one time period) received in the future present value current value of income V = R 1 /(1+i) 1 + R 2 /(1+i) R n /(1+i) n (multi-time period) received in the future balance of trade excess of exports over Exports - Imports trade deficit on goods & serv. imports means more imports than exports

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