Perfect Competition
IF there is perfect competition,
market outcomes should be optimal for the consumer and society
This long run equilibrium is interpreted as a ____ outcome
socially optimal
Firms produce at minimum cost.
Consumers get goods at lowest price.
Short run outcomes are not socially optimal, but optimality is
reached by competitive markets in the long run.
Imperfect competition
A firm that has some control over the market price of its product operates in an imperfectly competitive market. To some degree a price-setter
Imperfect competition does not push price to min ATC.
Firms will earn economic profit in the long-run
Monopolies are ___ and ____ creations
economic and political
Returns to scale refers to
the percentage change in output from a given percentage change in ALL inputs
In a perfectly competitive market ...
1. All firms sell the same standardized product
2. Many buyers, many sellers.
3. Productive resources are mobile (free entry/exit)
4. Buyers and sellers are “well-informed”.
Pareto efficiency exists when
no change could be made to benefit one party without harming the other
– Different from engineering efficiency
– Equilibrium price and quantity are pareto efficient
– Prices above or below equilibrium are not
Most markets are ____ competitve
imperfectly
What is Market Power?
is the firm's ability to raise its price without losing all its sales
Decreasing returns to scale means the firm
becomes less efficient as it becomes larger.
ex. handcrafted art
Long-run price =
Long-run price = production cost + normal profit
Adam's Smith Invisible Hand is a justification for what economic policies?
laissez faire. =. "let them be"
Invisible hand = This optimum occurs even though no one set out to produce a socially optimal outcome. This was an unintended consequence
Monopoly
only one seller of a good with no close substitutes
What are the five sources of Market power?
1. Exclusive control over inputs
2. Patents, copyrights, and trademarks (innovation)
3. Government licenses or franchises
4. Economies of scale (natural monopolies)
5. Network economies
Constant returns to scale =
CRS means production =
CRS = scaling all inputs up increases production by the same amount
CRS means production = production does not become more efficient when the firm becomes larger.
In the short run, supply and demand determine...
equilibrium price and quantity
Previously we showed the result of perfect competition in the long-run is
1. Zero (economic) profit.
2. Firms produce at minimum ATC
Profit seeking with free entry/exit leads to this result.
Monopolistic competition
many firms producing slightly differentiated products that are close substitutes but not perfect substitutes
Network economies occur when
the value of the product increases as the number of users increases
• Social media platforms
• Windows operating system
Increasing returns to scale results in a
“natural monopoly”
In the long run:
1. Price is determined by feasible production technology.
2. Demand determines the quantity supplied, but nothing else.
3. Firms earn normal profit, but no economic profit.
4. Consumers pay the lowest price for the good that still provides normal profit for the producer.
Imperfect Competition Influential person
Joan Robinson
• Author of The Economics of Imperfect Competition (1933)
• Central figure in some of the major controversies in 20th century economics.
• Major influence on UMKC Economics.
Oligopoly
has a small number of large firms producing products that are close or perfect substitutes
Why does a Monopolist not have a supply curve?
A supply curve is a determinate relationship between price and quantity supplied
This does not exist for a monopolist
Increasing returns to scale =
Increasing returns to scale means as the size of the firm increases:
IRS = output increases by a greater percentage than the increase in inputs
1. production efficiency increases
2. Average total cost decreases with output
3. Marginal cost decreases with output.