3. Perfect competition
• A Market where many buyers and sellers (small
firms = price takers) trade identical products ,
with perfect information and perfect mobility
of factors of production and that each buyer
and seller is a price taker determined by the
equilibrium of forces of supply and demand
• Under Perfect Competition the quality of the
product is enhanced, while the price of the
product tends to fall therefore Consumers gain
under Competition while Producers tend to
loose
4. Characteristics of Perfect Competition
1. Many Small Sellers competing in the Market: Price Takers. In
other words they will accept at what ever market price they
sell their product
2. Homogeneous product of all the firms: The quality of the
product will all the sellers is the same
3. Many Close Substitutes of the product are available in the
market Therefore the consumer has a choice to move away
from a product
4. Perfect Information about the number of sellers, buyers,
quality of the product and Price in each shop of the product as
well as any other information is available to all the buyers and
sellers
5. Perfect Mobility of factors of Production from one producer to
another and from producing one good (x) to another (y)
6. No Restraints of entry or exit to and from the market by
entrepreneurs at no extra costs
7. No Government intervention in the market to limit demand,
supply or price of the product
8. No Advertisement or marketing cost
5. AR (D) = MR
E
P
MC
Q
AC1 Loss (AC > MR)
AC2 normal profit AC =MR)
AC3 super normal
Profit (AC < MR)
6. Monopoly
• Is a market situation where the sole seller of a product
and has no close substitutes
• Monopsony is where there is a sole buyer in the market
• Natural monopoly arises because a single firm can
supply goods or services to an entire market at a
smaller cost than two or more firms this happens when
a firms average-total-costs curve declines over a longer
period of time.
• Government created monopolies arise because
government have given one firm the exclusive rights to
sell some goods or services
• Monopolies are usually inefficient, quality of the
product goes down and price of the product goes up. In
Monopoly producer gains while consumers tend to
loose
7. Characteristics of Monopoly
1. One Large Producer (Seller) . in the Market: Price Maker. Influences
Demand, Supply or Price of the Product. Single Buyer in the Market is
called MONOPSONY
2. Homogeneous product of all the firms: The quality of the product is
the same
3. No Close Substitutes of the product are available in the market
4. Very Little Information is available to all the buyers
5. No Mobility of factors of Production from one producer to another
and from producing one good (x) to another (y)
6. entry or exit to and from the market by entrepreneurs is Restricted
7. There is Government intervention in the market to limit demand,
supply or price of the product
8. No Advertisement or marketing cost as the Monopolist controls the
Market
• Natural Monopoly exists when the Sole Producer has all the rights over
backward linkages or forward linkages
• Government Regulations can also create Monopoly Situation
8. Welfare cost of monopolies
• A firm charges monopoly price which is over and above the
marginal costs and monopoly profits arise.
• At monopoly price not all consumers who value the goods at
more than its costs buy it and this reduces the consumer
surplus.
• The quantity produced and sold by the monopolist is below
the socially efficient levels
• The deadweight loss reflects the costs of monopoly
production
• Monopolies are large firms and therefore usually are
inefficient, because they are making profits due to lack of
competition and therefore do not work at their efficient cost
levels
10. Characteristics of Monopolistic
Competition
1. Many Small Seller in the Market: Price Maker.
2. Not Homogeneous product of all the firms: The
quality of the product is NOT the same
(Differentiated Product) = The quality, fragrance,
brand name, wrapping, color or shape of the product
differs to make the product a monopoly
3. Price Discrimination = Different People paying
different Prices for the same product. The seller
knows the difference of buying power of different
consumers (buyers)
4. Few Close Substitutes of the product are available in
the market
5. Advertisement cost
12. Product differentiation and Price
discrimination
• Product differentiation: Firms change the shape,
color, fragrance, brand name, shape, wrapping of
the product to charge different prices at different
markets
• Price Discrimination: Firms charge different prices
for the same product in different markets
• Advertisement: Advertisement and marketing are
tools of monopolistic firms to attract buyers
towards their products. Advertisements increase
revenues but increase costs also
• Kinked demand curve:
13. Ten Principles of Economics
1. People Face Tradeoff’s
2. There are Opportunity Costs to every Decision
3. Rational People think on the Margin
4. People Respond to Incentives
5. Trade Increases Welfare of all
6. Markets are efficient
7. Governments can increase efficiency of the market
8. Production of Goods and services increases Incomes
and wealth
9. Increase in incomes increases inflation and prices
10. Short-term tradeoff’s have to be made between
inflation and employment
13
