Chapter 7: Monopoly, Oligopoly, and. Monopolistic . Distinguish among three types of imperfectly. competitive . Define imperfect competition and describe how it. differs from perfect . Describe why economies of scale are the most. enduring source of monopoly . Apply the concepts of marginal cost and marginal. revenue to find the output and price that maximizes. a monopolists . Explain why the profit-maximizing output level for a. monopolist is too small from societys . Discuss why firms offer discounts to buyers who are. willing to jump a Hill/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:. has only one seller, no close substitutes. competition has many firms. producing slightly differentiated products that are. reasonably close substitutes. has a small number of large firms. producing products that are close substitutes. 72 Monopolistic Competition. Monopolistic Perfect. Competition of. Many firms Many Limited flexibility Price and Exit Free Differentiated . Zero in long run Zero in long . P, Q, Q only. differentiation. 73 Oligopoly. Oligopoly Perfect. of Few firms,.Firms each large Many firmsPrice Some flexibility Price and. Difficult . Differentiated Standardized. . Possible Zero in long . 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
