A COMPARISON OF
PERFECT COMPETITION, MONOPOLISTIC COMPETITION, MONOPOLY, & OLIGOPOLY
Type of Number of Type of
Market Sellers Product Price SR profit LR Profit
------- ---------- ------- ----- --------- ---------
perfect equal pos., neg.,
competition many identical to MC or zero zero
monopolistic greater pos., neg.,
competition many differentiated than MC or zero zero
greater pos., neg., pos. or
monopoly one ----- than MC or zero zero
oligopoly few identical or greater pos., neg., pos. or
differentiated than MC or zero zero
PERFECT COMPETITION, MONOPOLY,
MONOPOLISTIC COMPETITION, AND OLIGOPOLY: GRAPHING TIPS
(1) For all firms, the MC curve must intersect the ATC at the minimum of the ATC curve.
(2) When a firm is making positive profits, the ATC curve must lie at least partially
below the demand curve.
(3) When a firm is making negative profits (losses), the ATC curve must lie entirely
above the demand curve.
(4) When a firm is making zero profits (breaking even), the ATC curve must be tangent to
the demand curve.
(5) For perfect competition, the firm’s demand curve must be horizontal and the same as
the MR curve.
(6) For monopolistic and monopolistically competitive firms, the firm’s demand curve
slopes down to the right. Theoretically, the monopolistic firm has a steeper demand
curve than the monopolis-tically competitive firm. For both the monopolistic and monopo-
listically competitive firms, the MR curve is twice as steep as the demand curve (if the
demand curve is a straight line).
(7) When a perfectly competitive firm is making zero profits, the ATC curve is tangent
to the demand curve at the minimum of the ATC curve.
(8) When the monopolistic or monopolistically competitive firm is making zero profits,
the ATC curve is tangent to the demand curve at an output level that is lower than the
output at the minimum of the ATC curve. The tangency must be directly above the
intersection of the MR and MC curves.
(9) When the oligopolist (in the kinked demand curve model) is making zero profits, the
ATC curve is tangent to the demand curve at the kink in the demand curve. This occurs at
an output level that is lower than the output at the minimum of the ATC curve. The
tangency must be directly above the intersection of the MR and MC curves.
(10) For the oligopolist (in the kinked demand curve model), the MC cost curve intersects
the MR curve in the vertical segment of the MR curve. Each of the downward-sloping
segments of the MR curve is twice as steep as the corresponding section of the demand
curve (if the demand curve segments are straight lines).
Perfectly Competitive Firm making Positive Profits (SR only):
MC ATC
P* D = MR
ATC*
Q* Q
Perfectly Competitive Firm making Negative Profit (SR only):
MC ATC
ATC*
P*
D = MR
Q* Q
Perfectly Competitive Firm making Zero Profits (SR or LR):
MC ATC
P*=ATC*
D = MR
Q* Q
Monopoly Firm making Positive Profits (SR or LR):
P
MC ATC
P*
ATC*
MR
Q* Q
Monopoly Firm making Negative Profit (SR only):
P
MC ATC
ATC*
P*
MR D
Q* Q
Monopoly Firm making Zero Profits (SR or LR):
MC ATC
P*=ATC*
MR D
Q* Q
Monopolistically Competitive Firm making Positive Profits
(SR only):
P
MC ATC
P*
ATC* D
MR
Q* Q
Monopolistically Competitive Firm making Negative Profit
(SR only):
P MC ATC
ATC*
P*
MR
Q* Q
Monopolistically Competitive Firm making Zero Profits (SR or LR):
MC ATC
P*=ATC*
MR D
Q* Q
Oligopoly Firm (Kinked Demand Curve Model) making Positive Profits (SR or LR):
P
MC ATC
P*
ATC*
MR D
Q* Q
Oligopoly Firm (Kinked Demand Curve Model) making Negative Profit (SR only):
ATC* MC ATC
P*
MR D
Q* Q
Oligopoly Firm (Kinked Demand Curve Model) making Zero Profits (SR or LR):
P
ATC
MC
P*=ATC*
MR
Q* Q
SOME TERMS AND DEFINITIONS
term definition formula notes
price elasticity percentage change in qty %∆Qd/%∆P after Q - before Q
of demand demanded that results from %∆Qd = -----------------
a 1% change in product price average Q
(similarly for %∆P)
price elasticity percentage change in qty %∆Qs/%∆P
of supply supplied that results from
a 1% change in product price
income elasticity percentage change in qty %∆Qd/%∆Inc
of demand demanded that results from
a 1% change in income
cross elasticity percentage change in qty %∆Qx/%∆Py
of demand demanded of good X that
results from a 1% change in
price of product Y
marginal utility the addition to utility that MU = ∆TU/∆Q
results from consuming one
more unit of a good
average utility the utility per unit of a AU = TU/Q
good
marginal revenue the addition to revenue that MR = ∆TR/∆Q If a firm is perf comp
results from producing one in product mkt,
more unit of a good MR = price of product
term definition formula notes
marginal cost the addition to cost that MC = ∆TC/∆Q
results from producing one
more unit of a good
average fixed the fixed cost per unit of a AFC = TFC/Q
cost good
average variable the variable cost per unit AVC = TVC/Q
cost of a good
average total the total cost per unit of ATC = TC/Q ATC = AFC + AVC
cost a good
four-firm concen- the sum of the shares of the CR = s1+s2+s3+s4
tration ratio 4 largest firms in the industry
Herfindahl index the sum of the squares of the H = s12+s22+...+sn2 monopoly H=10,000
shares of all firms in the
industry
marginal physical the additional output that MPP = ∆Q/∆L
product results from hiring one more
unit of an input
marginal revenue the additional revenue that MRP=∆TR/∆L=(MR)(MPP)
product results from hiring one more
unit of an input
term definition formula notes
marginal resource the additional cost that MRC = ∆TC/∆L
cost results from hiring one more
unit of an input
value of the the additional output from VMP = (P)(MPP) If firm is perf comp
marginal product hiring one more unit of an in product mkt,
input multiplied by the MRP = VMP
price of the output
real interest rate of interest adjusted real i = money i
rate for inflation minus infl rate
present value current value of income PV = Rt/(1+i)t
(one time period) received in the future
present value current value of income PV = R1/(1+i)1+ R2/(1+i)2+...+
n
Rn/(1+i)
(multi-time period) received in the future
balance of trade excess of exports over Exports - Imports trade deficit
on goods & serv. imports means more
imports
than exports