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Welcome to the
ECONOMIC ANALYSIS
Class!
P* = 20

15

q* = 1500
Price/unit MC
60

50

40

30

20

10 D
Q
1 2 3 4 5 6

MR
 Industry vs Firms
A group of business or firms that produce
the same product or service
Criteria of Classifying Market Structures
-- Number of firms in the industry
--the nature of good or service produced
--Conditions of entry or exit in the industry
 4 Distinct Market Structures

1. Pure Competition
2. Monopoly
3. Oligopoly
4. Monopolistic Competition
-- Large number of sellers and buyers
For an individual firm, the combined effects
No individual is large enough to affect the market.
of these characteristics has no power to
--control
Product is price
the homogeneous
and will earn zero economic
(non-differentiated)
profit
Milk in the
A or long
Milk B orrun.
Milk C, etc.
-- There is perfect information
-- Easy entry and exit
Firm Supply Market Supply

Supply
Price Price

New P*
Supply

Q Q
Individual Demand Market Demand

Price Price

P*

Q Q
 If the individual cannot set the price,
? where does the price come from?
Supply
Price

Prevailing Price
P*

Demand

Quantity
?
 MR = MC

q*
 Firm X
P
MC

P* D = MR
Profit ATC
AVC
TR
TC

0 Q
Q*
Produce where MR meets MC.
P* = 20

15

Profit = (P*-ATC) Q*
q* = 1500 = (20*-15) (1500)
= P7,500
Solve for the firm’s profit. 5 Bonus points to first
five problem solvers.
 P2* P2*=d2=MR

q*

In the long run, a perfectly competitive firm’s

profits are always equal to zero.
“Competition is a game for the
immature”.
COMPETE
COMP
Only
OnlyETE
immature
immature
competes.
competes.
Cotton Competition Natural
price Profit
clothing among buyers

(higher demand)

Self-adjusting Economy

Production Supply Competition Price

among
buyers
(Cannibalise) STATE OF
NORMALCY
 MONOPOLY/ PURE MONOPOLY
1. There is a single seller.
2. One firm dominates the market.

3. The firm is price maker not a price taker.

4. The product is unique.

5. Entry is very difficult.
6. Economic profit is earned in the long run.
 PriceQuantity TR MR
Sold
60 M 1 60 M 60 M
50 M 2 100 M 40 M
40 M 3 120 M 20 M
30 M 4 120 M 0M
20 M 5 100 M -20 M
10 M 6 60 M -40 M

Graph the schedule above in 5 minutes in your

notebook. First five, + 5 points!
 MC
Price/unit
60 Profit = (P*-ATC) (Q*)
50 = (40-30) (3)
40 = P 30M
30
ATC

20

10 D
Q
1 2 3 4 5 6

MR
To raise prices, the firm can reduce output.

To sell more output, reduce the price

Profit-maximizing rule: MR = MC
 Oligopoly
Features
1. Few number of sellers
2. Product is differentiated or not
3. Difficult to enter/exit
4. Mutual interdependence
Types
1. Non-price Oligopoly
2. Price Leader
3. Cartel
Characteristics of Monopolistic Competition
CARTEL = Oligopoly 1 = Monopoly

OPEC
Price/unit MC

60
Profit = (P*-ATC) (Q*)
50
= (40-30) (3)
40
= P 30M
30 ATC
20

10 D
Q
1 2 3 4 5 6

MR
Characteristics of a Monopolistic Competition