1. Perfect Competition and Monopoly
Market Structure
Perfect Competition – Assumptions
 Large number of buyers and sellers
 Product Homogeneity
o Price takers
 Free entry and exit of firms
 Goal of all firms is to maximize profit
 No government regulations
The market structure in which above assumptions are fulfilled is called pure competition.
Additional Assumptions
 Perfect mobility of factors of production
o Workers can move between different jobs
o Factors not owned by one party
o Labor is not unionized
 Perfect knowledge
 In below table,
𝑇𝑅 (𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) = 𝑄𝑥𝑃
𝑇𝑅
𝐴𝑅 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =
𝑄
∆𝑇𝑅
𝑀𝑅 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =
∆𝑄
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html

2. Short Run Equilibrium of the firm
There are two approaches for determine the profit maximization equilibrium
1. Total approach
2. Marginal approach
At that max gap,
profit maximizes.
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html

3. Short Run Equilibrium of the firm
Example: Use Knowledge from above graph and lecture.
Long Run Equilibrium of the firm
 Earning just normal profits
 If the firm makes losses in the long run they will leave the industry
 LMC = LAC = P = MR
Monopoly
 Single seller
 No close substitute
 Barriers to entry
 Price maker
 Absence of competition
 Inelastic demand curve
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html

4. The main causes that lead to monopoly are the followings,
 Ownership of strategic raw materials or exclusive knowledge of production techniques.
 Patent rights for a product or for a production process
 Government licensing or the imposition of foreign trade barriers to exclude foreign
competitors.
 Natural Monopoly (size of the market do not allow multiple sellers)
 Pricing policy, heavy advertising or continuous product different ion.
Example - Monopoly – short run equilibrium
Price Discrimination
 Same product is sold at different prices to different buyers.
 The product and cost are basically same. But it may have slight differences.
 Ex. Different location of seats in a theatre
 Necessary conditions, which must be fulfilled for the implementation of price discrimination
 the market must be divided in to sub-markets with different price elasticities
 There must be effective separation of the sub - markets
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-
business-economics-and-financial.html