PERFECT

COMPETITION
AND MONOPOLY
Presentation by:
Gio Marcos

Let’s Start
OUTLINE
Introduction
Characteristics of Perfect Competition
Characteristics of Monopoly
Market Outcomes
Comparison of Perfect Competition and
Monopoly
 Definition of Perfect Competition

Perfect competition is a market structure characterized by a large number of small firms,

homogeneous products, and easy entry and exit from the market. In this scenario, no single
firm can influence the market price because each firm’s output is relatively small compared to
the overall market. Key features include:

Many buyers and sellers: There are so many participants that no single buyer or seller can
dictate prices.
Homogeneous products: Products offered by different firms are identical.
Perfect information: All consumers and producers have access to information about
prices and products.
No barriers to entry or exit: Firms can freely enter or leave the market without facing
significant obstacles.
 Definition of Monopoly

A monopoly is a market structure where a single firm dominates the market, producing a
unique product with no close substitutes. This firm has significant control over the price
and quantity of the product available in the market. Key features include:

Single seller: One firm is the sole provider of a product or service.

Price maker: The monopolist can influence the market price by adjusting the output
level.
Barriers to entry: High barriers prevent other firms from entering the market, which
may include legal restrictions, control of essential resources, or significant startup
costs.
Unique product: The product offered has no close substitutes, giving consumers no
other options.
 Importance of Studying Market
Structures
1. Understanding Economic Behavior: Different market structures influence the behavior of firms
and consumers, impacting pricing, output decisions, and overall market efficiency.
2. Policy Implications: Knowledge of market structures informs government policies and regulations
aimed at promoting competition, preventing monopolies, and protecting consumer interests.
3. Strategic Business Decisions: Firms can develop effective business strategies by understanding
their competitive environment, leading to better decisions regarding pricing, product
development, and market entry or exit.
4. Resource Allocation: Understanding how different structures affect resource allocation helps
economists and policymakers promote efficient market functioning and overall economic welfare.
5. Impact on Innovation: Market structures can affect incentives for innovation and technological
advancement, which are essential for economic growth.
 Importance of Studying Market
Structures
1. Understanding Economic Behavior: Different market structures influence the behavior of firms
and consumers, impacting pricing, output decisions, and overall market efficiency.
2. Policy Implications: Knowledge of market structures informs government policies and regulations
aimed at promoting competition, preventing monopolies, and protecting consumer interests.
3. Strategic Business Decisions: Firms can develop effective business strategies by understanding
their competitive environment, leading to better decisions regarding pricing, product
development, and market entry or exit.
4. Resource Allocation: Understanding how different structures affect resource allocation helps
economists and policymakers promote efficient market functioning and overall economic welfare.
5. Impact on Innovation: Market structures can affect incentives for innovation and technological
advancement, which are essential for economic growth.
CHARACTERISTICS
OF PERFECT
COMPETITION
 Many Buyers and Sellers

A. Many Buyers and Sellers

In a perfectly competitive market, there are numerous buyers and sellers,

ensuring that no single entity has the power to influence market prices.
The large number of participants means that individual firms are too small to
affect the overall market supply or demand, making competition high.
This leads to a highly responsive market where prices reflect the true
equilibrium of supply and demand.
 Homogeneous Products

B. Homogeneous Products

The products offered by firms in perfect competition are identical or

homogeneous; that is, consumers perceive them as perfect substitutes.
This characteristic minimizes brand loyalty because buyers can easily switch
from one seller to another without any loss in quality or satisfaction.
As a result, competition is primarily based on price rather than branding or
product differentiation.
 Homogeneous Products
C. Free Entry and Exit in the Market

Perfect competition allows firms to enter or exit the market with ease. There
are no significant barriers to entry or exit, such as high startup costs,
regulations, or monopolistic practices.
This freedom encourages new firms to join the market when they see
opportunities for profit, leading to an efficient allocation of resources over
time.
Conversely, if firms are unable to make a profit, they can exit the market
without significant loss, thereby preventing long-term inefficiencies.
 Perfect Information
D. Perfect Information

All participants in a perfectly competitive market have perfect and complete

information regarding prices, product quality, and availability.
This means that consumers can make informed decisions about purchases,
while firms can adjust their strategies based on accurate market conditions.
Perfect information enhances competition as no firm can take advantage of
others through misinformation or lack of transparency.
 Price Takers
E. Price Takers

In perfect competition, firms are considered "price takers," meaning they must
accept the market price as given and cannot set their own prices.
Since their individual production levels are insignificant relative to the overall
market supply, they have no power to influence the price of the product.
If a firm tries to charge a price higher than the market price, consumers will
simply purchase from other firms offering the same product at the lower
market price.
Together, these characteristics create an environment where
firms compete fully, leading to an efficient allocation of
resources and optimal pricing for consumers. Perfect
competition serves as a benchmark for evaluating other
market structures, helping economists understand deviations
from this ideal scenario.
CHARACTERISTICS
OF MONOPOLY
 Single Seller

A. Single Seller

In a monopoly, there is only one firm that provides the entire supply of a
good or service in the market.
This single seller effectively dominates the market, giving it significant
control over the pricing and availability of the product.
The absence of competition allows the monopolist to establish market rules
and conditions.
 Unique Product Without Close
Substitutes
B. Unique Product Without Close Substitutes

The product offered by the monopolist is unique and has no close

substitutes, meaning that consumers cannot easily switch to alternative
products.
This lack of substitutes grants the monopolist greater power over
consumers, as they must buy from the monopolist even if prices are high.
The uniqueness of the product can arise from various factors, such as
patented technology, exclusive access to resources, or brand loyalty.
 High Barriers to Entry

Monopolies face significant barriers to entry that prevent other firms from entering the
market and competing.
These barriers can take various forms, including:
Legal Barriers: Patents, licenses, or government regulations that grant exclusive
rights to the monopolist.
Economic Barriers: High capital requirements or substantial startup costs that
deter new entrants.
Control of Resources: Ownership of critical resources that other firms need to
produce the product.
These barriers ensure the monopolist can maintain its dominant position without
threat from new competitors.
 Price Maker

The monopolist is a "price maker," meaning it has the power to set the
price for its product rather than accepting the market price.
By adjusting the quantity of the product supplied, the monopolist can
influence the market price.
Typically, a monopolist will choose the output level at which marginal
cost equals marginal revenue, resulting in a price that is higher than in
competitive markets.
 Potential for Economic Profits
in the Long Run
Due to the lack of competition and high barriers to entry, monopolists
can earn economic profits consistently over time.
Unlike firms in perfectly competitive markets that face diminishing or
zero economic profits in the long run, a monopolist can maintain higher
profits by restricting output to drive up prices.
This ability to maintain profits raises questions about market efficiency
and consumer welfare, as monopolies can lead to higher prices and
reduced output compared to more competitive market structures.
 Operation of a Perfectly Competitive
Market in the Short Run

In the case of the perfect competition

model, since sellers are price takers
and their presence in the market is of
small consequence, the demand curve
they see is a flat curve, such that they
can produce and sell any quantity
between zero and their production
limit for the next period, but the price
will remain constant
These characteristics create a market environment where the
monopolist holds considerable power over prices and production,
potentially resulting in inefficiencies and the failure to maximize
consumer welfare. Understanding these features is essential for
policymakers who aim to regulate monopolies and promote
competition in the marketplace.
MARKET EQUILIBRIUM
AND THE PERFECT
COMPETITION MODEL
 Firm Supply Curves and Market
Supply Curves

Based on the preceding rule, a relationship

between the market price and the optimal
quantity supplied is the segment of the
marginal cost curve that is above the
shutdown price level and where the
marginal cost curve is increasing, up to the
point of maximum production. For prices
higher than the marginal cost at maximum
production, the firm would operate at
maximum production.
 Market Equilibrium

The market equilibrium is the quantity

and associated price at which there is
concurrence between sellers and
buyers. If the market demand curve
and market supply curve are displayed
on the same graph, the market
equilibrium occurs at the point where
the two curves intersect.
 Why Perfect Competition Is
Desirable?
n a simple market under perfect competition, equilibrium occurs at a quantity and
price where the marginal cost of attracting one more unit from one supplier is
equal to the highest price that will attract the purchase of one more unit from a
buyer. At the price charged at equilibrium, some buyers are getting a bargain of
sorts because they would have been willing to purchase at least some units even
if the price had been somewhat higher. The fact that market demand curves are
downward sloping rather than perfectly flat reflects willingness of customers to
make purchases at higher prices.
 Why Perfect Competition Is
Desirable?
If we determined this surplus for each
item purchased and accumulated the
surplus, we would have a quantity
called consumer surplus. Using a graph
of a demand curve, we can view
consumer surplus as the area under
the demand curve down to the
horizontal line corresponding to the
price being charged
 Why Perfect Competition Is
Desirable?

On the supplier side, there is also a potential

for a kind of surplus. Since market supply
curves are usually upward sloping, there are
some sellers who would have been willing to
sell the product even if the price had been
lower because the marginal cost of the item
was below the market price, and in perfect
competition, a producer will always sell
another item if the price is at least as high as
the marginal cost.
 HOW A PROFIT-
MAXIMIZING MONOPOLY
CHOOSES OUTPUT AND
PRICE
Demand Curves Perceived by a Perfectly
Competitive Firm and by a Monopoly

A perfectly competitive firm acts as a price

taker, so its calculation of total revenue is made
by taking the given market price and multiplying
it by the quantity of output that the firm
chooses. The demand curve as it is perceived by
a perfectly competitive firm appears. The flat
perceived demand curve means that, from the
viewpoint of the perfectly competitive firm, it
could sell either a relatively low quantity like Ql
or a relatively high quantity like Qh at the
market price P.
 Demand Curves Perceived by a Perfectly
Competitive Firm and by a Monopoly

While a monopolist can charge any price for its product, that
price is nonetheless constrained by demand for the firm’s
product. No monopolist, even one that is thoroughly protected
by high barriers to entry, can require consumers to purchase its
product. Because the monopolist is the only firm in the market,
its demand curve is the same as the market demand curve,
which is, unlike that for a perfectly competitive firm, downward-
sloping.
 Total Cost and Total Revenue for a
Monopolist

Total Revenue and Total Cost for the HealthPill

Monopoly. Total revenue for the monopoly
firm called HealthPill first rises, then falls. Low
levels of output bring in relatively little total
revenue, because the quantity is low. High
levels of output bring in relatively less revenue,
because the high quantity pushes down the
market price. The total cost curve is upward-
sloping. Profits will be highest at the quantity
of output where total revenue is most above
total cost.
 Total Cost and Total Revenue for a
Monopolist

Marginal Revenue and Marginal Cost for the

HealthPill Monopoly. For a monopoly like HealthPill,
marginal revenue decreases as additional units are
sold. The marginal cost curve is upward-sloping. The
profit-maximizing choice for the monopoly will be to
produce at the quantity where marginal revenue is
equal to marginal cost: that is, MR = MC. If the
monopoly produces a lower quantity, then MR > MC
at those levels of output, and the firm can make
higher profits by expanding output. If the firm
produces at a greater quantity, then MC > MR, and
the firm can make higher profits by reducing its
quantity of output.
Costs and Revenues of HealthPill

A monopolist can determine its profit-

maximizing price and quantity by
analyzing the marginal revenue and
marginal costs of producing an extra
unit. If the marginal revenue exceeds the
marginal cost, then the firm should
produce the extra unit.
 Maximizing Profits

Step 1. Remember that marginal cost is defined as the change in total cost from producing a
small amount of additional output.

Step 2. Note that in Table 3, as output increases from 1 to 2 units, total cost increases from
$1500 to $1800. As a result, the marginal cost of the second unit will be:
 Maximizing Profits

Step 3. Remember that, similarly, marginal revenue is the change in total revenue from
selling a small amount of additional output.

Step 4. Note that in Table 3, as output increases from 1 to 2 units, total revenue increases
from $1200 to $2200. As a result, the marginal revenue of the second unit will be:
Illustrating Monopoly Profits

It then adds an average cost curve and the demand

curve faced by the monopolist. The HealthPill firm first
chooses the quantity where MR = MC; in this example,
the quantity is 4. The monopolist then decides what
price to charge by looking at the demand curve it faces.
The large box, with quantity on the horizontal axis and
marginal revenue on the vertical axis, shows total
revenue for the firm. Total costs for the firm are shown
by the lighter-shaded box, which is quantity on the
horizontal axis and marginal cost of production on the
vertical axis. The large total revenue box minus the
smaller total cost box leaves the darkly shaded box that
shows total profits. Since the price charged is above
average cost, the firm is earning positive profits.
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