Perfect competition and pure monopoly

1
Perfect competition and pure monopoly

• In a perfectly competitive market, both buyers
  and sellers believe that their own actions have
  no effect on the market price. In contrast, a
  monopolist, the only seller or potential seller
  in the industry, sets the price.

2

• Perfect competition means that each firm or
  household, recognizing that its quantities
  supplied or demanded are trivial relative to the
  whole market, assumes its actions have no effect
  on the market price. This assumption was built
  into our model of consumer choice in Chapter 5.
  Each consumer's budget line took market prices as
  given, unaffected by the quantities then chosen.
  Changes in market conditions, applying to all
  firms and consumers, change the equilibrium price
  and hence individual quantities demanded, but
  each consumer neglects any feedback from his own
  actions to market price.

3
Perfect competition

• If an individual's action does not affect the
  price, a perfectly competitive industry must have
  many buyers and many sellers. Each firm in a
  perfectly competitive industry faces a horizontal
  demand curve as in Figure 8-1. However much the
  firm sells, it gets the market price, if it
  charges a price above fn it will not sell any
  output buyers will go to other firms whose
  product is just as good. Since the firm can sell
  as much as it wants at P0, it will not charge
  less than P0. The individual firm's demand curve
  is DD.

4
The competitive firm's demand curve
Price
DD
Po
Quantity
5
A perfectly competitive firm's supply decision

• This general theory must hold for the special
  case of perfectly competitive firms. The special
  feature of perfect competition is the
  relationship between marginal revenue and price.
  A competitive firm faces a horizontal demand
  curve. Making and selling extra output does not
  bid down the price for which existing output is
  sold. The extra revenue from selling an extra
  unit is simply the price received. A perfectly
  competitive firm's marginal revenue is its output
  price,

6
Global competition

• Changes in conditions in domestic markets often
  reflect events abroad. Fish prices in Western
  Europe fell in the 1990s after suppliers from the
  ex-USSR joined the world economy. Wool prices in
  the EU rise when a drought in Australia hits
  sheep farmers there. Competitive markets in
  different countries are linked together by
  international trade.

7

• When transport costs are low, a commodity's
  price in one country cannot vary much from its
  price in other countries. In the extreme case,
  the 'Law of One Price' holds. If there are no
  obstacles to trade and no transport costs, the
  price of a given commodity is the same all over
  the world. Suppliers sell in the market with the
  highest price, but consumers buy in the market
  with the lowest price. Trade makes the two prices
  the same.

8
Pure monopoly the opposite limiting case

• A perfectly competitive firm is too small to
  worry about any effect of its output decision on
  industry supply and hence price. It can sell as
  much as it wants at the market price. We next
  discuss the opposite limiting case of market
  structure, the case of pure monopoly.

9

• A monopolist is the sole supplier and potential
  supplier of the industry's product.

10
A monopoly has no supply curve

• A competitive firm sets price equal to marginal
  cost if it supplies at all. If we know its
  marginal cost curve we know how much it supplies
  at each price. Aggregating across firms, we also
  know how much the industry supplies at each
  price. We can draw the supply curve without
  knowing anything about the market demand curve.