Competitive Market vs Monopoly: Key Features and Comparisons môn Kinh tế vi mô | Trường Đại học Kinh Tế Quốc Dân

Competitive Market
Monopolistic Competition Monopoly 1. Properties Many firms -Many firms Only one firm Sell the identical products
-Sell the differentiated products. E.g. No closed substitutions
shampoo: Clear, Headshore, Xman…
• Significant market power → Price
→No market power→ Price Taker
→Still have market power (Negligible) Maker →Free Entry and Exit →Free Entry and Exit →No Entry and Exit 2. Features
2.1. Demand curve: horizontal line (Edp=
2.1.Demand Curve (like monopoly):
2.1. Demand curve: downward sloping
infitity)→ perfectly elastic downward sloping curve curve (D): P= a-bQ (D): P= a-bQ
As compared to the monopoly, the slop
The slope is relatively steep→ Reflect the
of demand curve is flatter reflecting the
market power of monopoly. (Relationship
market power of firm in this market is
between market power and elasticity level) weak.
2.2. Marginal Revenue: MR coincides with
2.2. Marginal Revenue like monopoly 2.2. Marginal Revenue
demand curve: MR=P* where P* is the TR=P*Q=(a-bQ)*Q=aQ-bQ^2 TR=P*Q=(a-bQ)*Q=aQ-bQ^2 market price. → MR=TR’(Q)= a-2bQ → MR=TR’(Q)= a-2bQ
2.3. Maximizing the profit: MR=MC=P*
2.3. Maximizing the profit: MR=MC

2.3. Maximizing the profit: MR=MC

2.4. Supply curve: is MC when P> AVCmin 2.4. No Supply curve
2.5. only Quantity Effect (The only way
2.5. Both the Price Effect and Quantity
2.5. Both the Price Effect and Quantity
firm that can improve the total revenue is
Effect because of downward sloping
Effect because of downward sloping curve to increase the quantity) curve
2.6. Competitive market is the most
2.6. Monopoly is not the effective market
2.6. Monopoly is not the effective market
effective market since NSB =CS+PS is the since DwL>0 since DwL>0
largest and there is no deadweight loss
2.7. Break-even point: P = ATCmin
2.7. Break-even point: P = ATC
2.7. Break-even point: P = ATC
The long-term equilibrium: Profit=0→ P=ATC because of free entry and exit that only
exist in the perfect competition and monopolistic competition.
➔ If positive profits→ new entrants→ profit decreases to zero
➔ If negative profits→ exiting firms exit→ loss decreases to zero
Therefore, in the long-run equilibrium, the profit is zero.
The long-term equilibrium: P = ATCmin
long-term equilibrium: P = ATC TR=P*Q
According the law of demand: P increase → Q decrease
Changes in P and Q cause changes in TR
• P increases→ TR increases→ Price Effect
• Q decrease→ TR decreases→ Quantity Effect
In the competitive market, P* is market price, thus it is constant→ The only way firm that can improve the total revenue is to increase the quantity. In the monopolistic market,
2.6. Competive market is the most effective market in term of Welfare
By compare the competitive market and monopoly in term Price, Quantity, Net Social Benefit
Net Social Benefit (NSB)= Consumer’s Surplus (CS)+ Producer’s Surplus (PS)
• Competitive market is considered as the most effective market (NSB is maximized in the competitive market)
• Monopoly decreases their quantity and then price will increase→ QmPc
• Welfare Analysis: There is the deadweight loss (DwL) in the monopoly.