BANGLADESH UNIVERSITY OF PROFESSIONAL

SUBMISSION DATEDECEMBER 18, 2014

Presentation On Monopoly & Perfect

Competition

Submitted ByKhaled Bin Arman_ID No. 1407081

Submitted ToMd. Shariful Islam Assistant ProfessorCourse Code: BUS 2303Department of Business Administration (EvMBA)Bangladesh University of Professional

In the pure case entry is blockaded.

Monopoly

A monopoly refers to a market where there is a single seller & many buyers.

Definition:

An industry structure in which a single seller of a product with no close substitutes serves the entire market.Monopolies set both price & quantity!

MONOPOLIES HAVE NO SUPPLY CURVE!

Conditions:Large number of buyers and one sellersProduct without close substitutesPerfect knowledgeBarriers to entryNo government intervention

Key Implications:Downward sloping firm’s demand is market demandFirm has market power and determines market price(can charge P > MR = MC)In the short run monopoly earns profit or loss or shuts downIn the long run profit > normal is sustainable indefinitely but evenwith profit = normal = 0 (monopoly does not operate efficiently)

Sources of Monopoly Power

Natural: Economies of scale and excess capacity Economies of scope and cost complementarities Capital requirements, sales and distribution networks Differentiated products and brand loyalty

Created: Patents and other legal barriers (licenses) Tying and exclusive contracts Collusion (tacit or open) Entry limit pricing (predatory pricing illegal)

Perfect Competition

Many (small) firms, producing a homogeneous (identical) product, none of which having an impact on the price; each firm's product is non-distinguishable from other firms' product.

Conditions:

Large number of buyers and sellers Homogeneous product Perfect knowledge Free entry and exit No government intervention All sellers and buyers have perfect information about the

market conditions. Many buyers none of whom having any effect on the price.

Key Implications:

Flat firms’ demand determined by market equilibrium price Market participants are price takers without any market power

to Influence prices (have to charge MR = P = MC) In the short run firms earn profits or losses or shut down In the long run profit = normal = 0 (firms operate efficiently)

Equilibrium output for both the monopolist and the competitor is determined by the MC = MR condition.

Comparing Monopoly and Perfect Competition

Because the monopolist’s marginal revenue is below its price, price and quantity will not be the same.

The monopolist’s equilibrium output is less than, and its price is higher than, for a firm in a competitive market.

Many “optimal-size” firms, each producing at the minimum long run average cost and charging the market price where:

MR = P = MC

MR=P, Marginal revenue is identically equal to the selling price.MR = MCAll profit-maximizing firms produce at an output level where marginal revenue equals marginal cost (MC), i.e.,

Equilibrium under Perfect Competition

Monopoly Vs Perfect Competition

Perfect Competition Many Sellers Many Perfect Substitutes Price Determined By

Market Not Individual Sellers (Face Perfectly Elastic Demand)

Monopoly One Seller No Closes Substitutes Price Determined By Only

Seller (Face Downward Sloping Demand)

$3630241812606

12

Price MC

1 2 3 4 5 6 7 8 9 10D

MR

Monopolist price

Competitive price

“THANK YOU”