Economics Micro & Macro (CliffsAP)

3. How do perfectly competitive firms compete?
   A. They engage in non-price competition.
   B. They engage in price competition.
   C. There is no competition between firms.
   D. They compete through a mix of non-price and price competition.
   E. None of the above.

Mini-Review Answers

1. B.The existence of many firms in the market is a characteristic of a perfectly competitive firm.


2. B.Profit exists in the short run and disappears in the long run because other firms enter the market.


3. C.There is no competition between firms in a perfectly competitive market.

Monopoly

A monopolyis when a single seller is the market and has no close substitutes. This is how a monopoly fits into the
market structure:

■ Number of firms:There is only one firm in a monopoly. The monopolist is the market and has no available sub-

stitutes or competitors. The firm is the single supplier of the product.

■ Type of product:The type of product a monopolist sells is original and unique. There are no close substitutes,

and if consumers do not buy the product, they are choosing to do without it completely.

■ Price control:Monopolists are price makers. This means that they set and control their prices for their good or

service. They also control the quantity supplied in the market. The demand curve still slopes downward for a

monopolist; however, it has the freedom to manipulate the curve by changing quantities.

Conditions of Entry

There is virtually no way into a monopoly’s market. No immediate competitors exist because a monopolist has techno-
logical or economic barriers. Monopolists enjoy a firm grip on their market and quantities.

Economies of scale play an important role in a monopoly. A monopoly can experience economies of scale in the long
run because of the absence of competition. The monopoly’s long-run average total cost curve declines because the firm
is able to produce quantities at low costs.

Monopolies have legal barriers to entry as well. Patents and licenses are given to pure monopolies (monopolies that the
government allows) to protect their market control and product information.

Basic Facts on Monopolies

Let’s take a look at a few characteristics of monopolies:

■ Monopolies can have long-run economic profits.

■ As with other firms, when MR = MC, a monopolist can determine profit.

■ In the long run, monopolies do not have to have fair market prices, allocative efficiency, or productive efficiency.

■ Monopolists will always produce at the minimum levels and charge at the maximum levels because a monopolist

is able to charge a price above the marginal cost of production.

Figure 10-6 shows a graph for a monopoly.

Part III: Microeconomics