MICRO 7

• Characteristics of perfect competition

  1. Very large, infinite
  2. homogeneous products
  3. Perfect information
  4. Free entry and exit

  Characteristics of monopoly

  1. One firm
  2. Homogeneous 1 product
  3. Perfect information
  4. Large barriers to entry and exit
• LR eqm of monopoly

  Monopolist can earn normal profit or supernormal profit in the LR

  Barriers to entry of new firms have made it possible for the monopolist to make supernormal profit in the LR

  The diff between SR and LR eqm is that in the LR the firm will prod the lv of output where MR = LR MC

   

  Monopolist only prod on elastic portion (abs PED > 1) of dd curve
• Social cost of monopoly (externality)

  A monopoly produces less output and charger a higher price

  MR<P for monopoly -> inefficiency

  PC firm is alr allocative eff, but pure monopoly isn't
• Evaluation

  Patents are offered to award firms in the pharmaceuticals industry who invest in research to produce medicine, but people argue that life-saving drugs should be made available immediately.