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15. Principles of Economics (Brief Edition)_2e (7)

Chapter 7: Monopoly, Oligopoly, and. Monopolistic Competition.1. Distinguish among three types of imperfectly. competitive industries.2. Define imperfect competition and describe how it. differs from perfect competition.3. Describe why economies of scale are the most. enduring source of monopoly power.4. Apply the concepts of marginal cost and marginal. revenue to find the output and price that maximizes. a monopolists profits.5. Explain why the profit-maximizing output level for a. monopolist is too small from societys perspective.6. Discuss why firms offer discounts to buyers who are. willing to jump a hurdle.McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved. Imperfect Competition.• Imperfectly competitive firms have some ability. to set their own price: they are price setters. – Long-run economic profits possible. – Reduce economic surplus.• Three types:. 1.Monopoly has only one seller, no close substitutes. 2.Monopolistic competition has many firms. producing slightly differentiated products that are. reasonably close substitutes. 3.Oligopoly has a small number of large firms. producing products that are close substitutes. 7­2 Monopolistic Competition. Monopolistic Perfect. Competition Competition.Number of. Many firms Many firms.Firms.Price Limited flexibility Price taker.Entry and Exit Free Free.Product Differentiated Standardized.Economic. Zero in long run Zero in long run.Profits. P, Q, product.Decisions Q only. differentiation. 7­3 Oligopoly. Oligopoly Perfect. Competition.Number of Few firms,.Firms each large Many firmsPrice Some flexibility Price taker.Entry and. Difficult Free.Exit. Differentiated or.Product Standardized. standardized.Economic. Possible Zero in long run.Profits. P, Q, differentiation,.Decisions Q only. advertising. 7­4 The Essential Difference.• Market power is the firms ability to raise its price. without losing all its sales.• Any firm facing a downward sloping demand curve. – Firm picks P and Q on the demand curve.• Market power comes from factors that limit. competition. Imperfectly Perfectly. Competitive Firm Competitive Firm. Price. Price. D D. Quantity Quantity 7­5 Market Power: Economies of. Scale.• Returns to scale refers to the percentage. change in output from a given percentage. change in ALL inputs. – Long-run idea. – Constant returns to scale: doubling all inputs. doubles output. – Increasing returns to scale: output increases by. a greater percentage than the increase in inputs. • Average costs decrease as output increases. • Natural monopoly: a monopoly that results from. economies of scale. 7­6 Market Power: Network. Economies.• Network economies occur when the value of. the product increases as the number of users. increases. – VHS format for video tapes, Blu-ray for DVDs. – Telephones. – Windows oper