A COMPARISON OF
PERFECT COMPETITION, MONOPOLISTIC COMPETITION, MONOPOLY, & OLIGOPOLY
Type of
Market
-------
Number of
Sellers
----------
Type of
Product
-------
Price
-----
SR profit
---------
equal
to MC
pos., neg.,
or zero
zero
greater
than MC
pos., neg.,
or zero
zero
greater
than MC
pos., neg.,
or zero
pos. or
zero
greater
than MC
pos., neg.,
or zero
pos. or
zero
perfect
competition
many
identical
monopolistic
competition
many
differentiated
monopoly
one
oligopoly
few
-----
identical or
differentiated
LR Profit
---------
PERFECT COMPETITION, MONOPOLY,
MONOPOLISTIC COMPETITION, AND OLIGOPOLY: GRAPHING TIPS
(1)
For all firms, the MC curve must intersect the ATC at the minimum of the ATC curve.
(2) When a firm is making positive profits, the ATC curve must lie at least partially
below the demand curve.
(3) When a firm is making negative profits (losses), the ATC curve must lie entirely
above the demand curve.
(4) When a firm is making zero profits (breaking even), the ATC curve must be tangent to
the demand curve.
(5) For perfect competition, the firm’s demand curve must be horizontal and the same as
the MR curve.
(6) For monopolistic and monopolistically competitive firms, the firm’s demand curve
slopes down to the right. Theoretically, the monopolistic firm has a steeper demand
curve than the monopolis-tically competitive firm. For both the monopolistic and monopolistically competitive firms, the MR curve is twice as steep as the demand curve (if the
demand curve is a straight line).
(7) When a perfectly competitive firm is making zero profits, the ATC curve is tangent
to the demand curve at the minimum of the ATC curve.
(8) When the monopolistic or monopolistically competitive firm is making zero profits,
the ATC curve is tangent to the demand curve at an output level that is lower than the
output at the minimum of the ATC curve. The tangency must be directly above the
intersection of the MR and MC curves.
(9) When the oligopolist (in the kinked demand curve model) is making zero profits, the
ATC curve is tangent to the demand curve at the kink in the demand curve. This occurs at
an output level that is lower than the output at the minimum of the ATC curve. The
tangency must be directly above the intersection of the MR and MC curves.
(10) For the oligopolist (in the kinked demand curve model), the MC cost curve intersects
the MR curve in the vertical segment of the MR curve. Each of the downward-sloping
segments of the MR curve is twice as steep as the corresponding section of the demand
curve (if the demand curve segments are straight lines).
Perfectly Competitive Firm making Positive Profits (SR only):
P
MC
ATC
P*
D = MR
ATC*
Q*
Q
Perfectly Competitive Firm making Negative Profit (SR only):
P
MC
ATC
ATC*
P*
D = MR
Q*
Q
Perfectly Competitive Firm making Zero Profits (SR or LR):
P
MC
ATC
P*=ATC*
D = MR
Q*
Q
Monopoly Firm making Positive Profits (SR or LR):
P
MC
ATC
P*
ATC*
D
MR
Q*
Q
Monopoly Firm making Negative Profit (SR only):
P
MC
ATC
ATC*
P*
MR
Q*
D
Q
Monopoly Firm making Zero Profits (SR or LR):
P
MC
ATC
P*=ATC*
MR
D
Q*
Q
Monopolistically Competitive Firm making Positive Profits
(SR only):
P
MC
ATC
P*
ATC*
D
MR
Q*
Q
Monopolistically Competitive Firm making Negative Profit
(SR only):
P
MC
ATC
ATC*
P*
D
MR
Q*
Q
Monopolistically Competitive Firm making Zero Profits (SR or LR):
P
MC
ATC
P*=ATC*
MR
Q*
D
Q
Oligopoly Firm (Kinked Demand Curve Model) making Positive Profits (SR or LR):
P
MC
ATC
P*
ATC*
MR
D
Q*
Q
Oligopoly Firm (Kinked Demand Curve Model) making Negative Profit (SR only):
P
ATC*
MC
ATC
P*
MR
Q*
D
Q
Oligopoly Firm (Kinked Demand Curve Model) making Zero Profits (SR or LR):
P
ATC
MC
P*=ATC*
D
MR
Q*
Q
SOME TERMS AND DEFINITIONS
term
definition
formula
price elasticity
of demand
percentage change in qty
demanded that results from
a 1% change in product price
%∆Qd/%∆P
price elasticity
of supply
percentage change in qty
supplied that results from
a 1% change in product price
%∆Qs/%∆P
income elasticity
of demand
percentage change in qty
demanded that results from
a 1% change in income
%∆Qd/%∆Inc
cross elasticity
of demand
percentage change in qty
demanded of good X that
results from a 1% change in
price of product Y
%∆Qx/%∆Py
marginal utility
the addition to utility that
results from consuming one
more unit of a good
MU = ∆TU/∆Q
average utility
the utility per unit of a
good
AU = TU/Q
marginal revenue
the addition to revenue that
results from producing one
more unit of a good
MR = ∆TR/∆Q
notes
after Q - before Q
%∆Qd = ----------------average Q
(similarly for %∆P)
If a firm is perf comp
in product mkt,
MR = price of product
term
definition
formula
marginal cost
the addition to cost that
results from producing one
more unit of a good
MC = ∆TC/∆Q
average fixed
cost
the fixed cost per unit of a
good
AFC = TFC/Q
average variable
cost
the variable cost per unit
of a good
AVC = TVC/Q
average total
cost
the total cost per unit of
a good
ATC = TC/Q
four-firm concentration ratio
the sum of the shares of the
CR = s1+s2+s3+s4
4 largest firms in the industry
Herfindahl index
the sum of the squares of the
shares of all firms in the
industry
H = s12+s22+...+sn2
marginal physical
product
the additional output that
results from hiring one more
unit of an input
MPP = ∆Q/∆L
marginal revenue
product
the additional revenue that
results from hiring one more
unit of an input
MRP=∆TR/∆L=(MR)(MPP)
notes
ATC = AFC + AVC
monopoly H=10,000
term
definition
formula
marginal resource
cost
the additional cost that
results from hiring one more
unit of an input
MRC = ∆TC/∆L
value of the
marginal product
the additional output from
hiring one more unit of an
input multiplied by the
price of the output
VMP = (P)(MPP)
real interest
rate
rate of interest adjusted
for inflation
real i = money i
minus infl rate
present value
(one time period)
current value of income
received in the future
PV = Rt/(1+i)t
notes
If firm is perf comp
in product mkt,
MRP = VMP
present value
current value of income
n
Rn/(1+i)
(multi-time period) received in the future
PV = R1/(1+i)1+ R2/(1+i)2+...+
balance of trade
on goods & serv.
imports
Exports - Imports
excess of exports over
imports
trade deficit
means more
than exports