Chapter 8: Managing in Competitive, Monopolistic and
Monopolistically Competitive Market
Perfectly competitive market – key conditions for perfect competition (e.g. agriculture and
computer software/chips):
1. There are many buyers and sellers in the market, each of which is “small” relative to the
market.
2. Each firm in the market produces a homogeneous (identical) product.
3. Buyers and sellers have perfect information.
4. There are no transaction costs.
5. There is free entry into and exit from the market.
The price is determined by the interaction of all buyers and sellers in the market. In a competitive
market, price is determined by the intersection of the market supply and demand curves.
A firm’s demand curve, the demand curve for an individual firm’s product, in a perfectly
competitive market is simply the market price.
The individual demand curve is perfectly elastic.
The pricing decision of the individual firm is trivial: charge the price that every other firm in the
industry charges. All that remains is to determine how much output should be produced to
maximize profits.
The profit-maximizing perfectly competitive firm produces the output at which price equals MC.
The short-run supply curve for a perfectly competitive firm is its MC curve above the minimum
point on the AVC curve.
The market (or industry) supply curve is closely related to the supply curve of individual firms in
a perfectly competitive industry. The horizontal sum of the MC of all firms determines how
much total output will be produced at each price.
As more firms enter the industry in the long-run, the industry supply curve shifts to the right. If
firms in a competitive industry sustain short-run losses, in the long run they will exit the industry
since they are not covering their opportunity costs.
Monopolistically Competitive Market
Perfectly competitive market – key conditions for perfect competition (e.g. agriculture and
computer software/chips):
1. There are many buyers and sellers in the market, each of which is “small” relative to the
market.
2. Each firm in the market produces a homogeneous (identical) product.
3. Buyers and sellers have perfect information.
4. There are no transaction costs.
5. There is free entry into and exit from the market.
The price is determined by the interaction of all buyers and sellers in the market. In a competitive
market, price is determined by the intersection of the market supply and demand curves.
A firm’s demand curve, the demand curve for an individual firm’s product, in a perfectly
competitive market is simply the market price.
The individual demand curve is perfectly elastic.
The pricing decision of the individual firm is trivial: charge the price that every other firm in the
industry charges. All that remains is to determine how much output should be produced to
maximize profits.
The profit-maximizing perfectly competitive firm produces the output at which price equals MC.
The short-run supply curve for a perfectly competitive firm is its MC curve above the minimum
point on the AVC curve.
The market (or industry) supply curve is closely related to the supply curve of individual firms in
a perfectly competitive industry. The horizontal sum of the MC of all firms determines how
much total output will be produced at each price.
As more firms enter the industry in the long-run, the industry supply curve shifts to the right. If
firms in a competitive industry sustain short-run losses, in the long run they will exit the industry
since they are not covering their opportunity costs.
