Perfect competition, monopoly, monopolistic competition, and oligopoly and how each affects pricing and output. Front: the term or market structure. Back: a plain-language definition.
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- Perfect competition
- A market structure with many buyers and sellers, homogeneous products, free entry and exit, and perfect information; firms are price takers.
- Why does perfect competition have many firms?
- No single firm can influence market price; competition from many rivals prevents any firm from earning abnormal profits.
- Homogeneous products in perfect competition
- All firms sell identical products; buyers see no reason to prefer one seller over another.
- Price taker
- A firm that accepts the market price and cannot influence it; the firm's output is too small relative to total market output.
- How do perfectly competitive firms set prices?
- They accept the market price determined by aggregate supply and demand; individual firms cannot raise price above market or they lose all sales.
- Free entry and exit in perfect competition
- Firms can easily enter or leave the market without legal or financial barriers; this eliminates long-run economic profit.
- Long-run economic profit in perfect competition
- Economic profit falls to zero as new firms enter in response to profit; only normal profit remains.
- Allocative efficiency in perfect competition
- Price equals marginal cost; resources are allocated to their highest-valued uses and no deadweight loss exists.
- Productive efficiency in perfect competition
- Firms produce where average total cost is minimized; there is no waste from excess capacity.
- Monopoly
- A market structure with one seller of a unique product; the firm has significant control over price and output.
- Barriers to entry in monopoly
- Legal, technological, or economic obstacles that prevent new firms from entering; examples include patents, licenses, and control of essential resources.
- Price maker
- A firm with market power that can set price above marginal cost; the firm faces a downward-sloping demand curve.
- How does a monopoly determine its price?
- It produces where marginal revenue equals marginal cost, then charges the highest price consumers will pay at that quantity.
- Why does a monopoly restrict output?
- To maintain high prices and maximize profit; the monopoly produces less than the socially optimal quantity.
- Can a monopoly earn economic profit in the long run?
- Yes; barriers to entry prevent competition, so the monopoly can sustain abnormal profit indefinitely.