Activity No. 6 1

Activity No.
6
1.
Pure Monopolistic
Characteristics Monopoly Oligopoly
Competition Competition
Number of 1. A very large 6. One 11. Many 16. Few
Firms number
Type of 2. Standardized 7. Unique-no 12. 17. Standardized

Products close substitutes Differentiated or differentiated
Price Setting 3. None 8. Considerable 13. Some, but 18. Limited by

and Control within narrow mutual
limits interdependence;
considerable with
illusion
Entry of Firm 4. Very easy. No 9. Blocked 14. relatively 19. Significant
obstacles easy Obstacles
Local 5. Agriculture 10. Local utilities 15. Retail trade 20. Automobile
Examples and shoes. and steel.
2. How does the purely competitive firm maximize its profit? Explain using graphical
illustration.
Beforehand, we have to understand that profit maximization stays where MC=MR. This
applies to any type of competition even though they have different rules.
Profit maximization in a purely competitive firm is relatively easy to understand. The
characteristics of a purely competitive firm are: it has many buyers and sellers which leads to
perfect information, identical products, and no barrier to entry/exit.
The basic rule in a perfectly competitive firm is that the price between the market and the
firm is equal. Moreover, the quantity that the firm will produce is at the part where MC intersects
the price. For a better understanding, Marginal Revenue = Demand = Price in the perfect
competition.
When it comes to profit and loss, these are the rules which will make the concept easier
to explain and understand:
When does the firm shut down?

In the short run, the firm will produce until P<ATC only.
In the long run, these are the possibilities:

3. How does a monopolist firm maximize its profit? Explain using graphical illustration.
A monopolist firm has only one seller and barriers. Its barrier is the economies of scale,
which produces natural monopoly and actions of the firm and government. In order to maintain its
uniqueness in the market, the firm's action ranges from patent and copyright to high advertising
expenditures for high sunk costs. On the other hand, the actions of the government usually focus
on franchises and licensing.
In monopolist firm, these are the rule in getting economic profit and loss:
In a monopolist, we also experience the dead weight loss. Dead-weight loss in the space
remaining from the consumer surplus up until the marginal revenue. Here, we can see the dead-
weight loss a monopolis firm:
In monopolist firms, we also experience price discrimination. Price discrimination is when
the firm charge more price to the customer that is inelastic with the product. It goes under the
conditions: of not being a price–taker, sort customer, and not feasible for sale.
Moreover, we do experience dumping in this type of market. Predatory dumping,
specifically, mentions the concept of lowering the price to drive out a domestic competitor and
increasing it when domestic competitors are destroyed.
This type of market gives rise to two more concepts: x-inefficiency and rent-seeking
behavior. X-inefficiency states that there is a firm who does not gain incentive in the least cost
production. On the other hand, rent-seeking behavior states that some firms gain monopoly power
by taking it as a cost. However, this behavior does not benefit the economy and drives the
resources away.
4. When should a monopolistically competitive firm exit the market? Explain using
graphical illustration.
For a better understanding, we have to understand monopolistic competitive firms first.
Monopolistic competition has many buyers and sellers, is differentiated, and is easy to enter/exit.
It is similar to perfect competition by having many buyers and sellers and having no barriers.
Moreover, it is similar to a monopoly by being a sole producer and by downward sloping demand
curve. An example of its graph in short-run is this:
For a monopolistic competitive firm to exit, they need to suffer losses. To suffer losses,
ATC should be higher than the price. Its graph works similarly to that of a monopolistic firm.
However, the entrance of different firms makes only its demand curve steeper. To illustrate:
5. Explain the three models of Oligopoly.
Kinked-Demand Theory has a kinked demand curve. The characteristic of
a kinked-demand curve is noncollusive.
This theory assumes that firms prices are settled on a price of P1 and
quantity Q1.
(a) At price D1 - demand curve is elastic above P1
- demand inelastic below P1
(b) Raising the price above P1 - it will cause an elastic demand
- it results in lost sales and falling Total
Revenue
(c) Cutting the price below P1 - it will cause a price reduction
- demand is relatively inelastic
(d) The Kink - demand is relatively elastic
- we need this in an oligoply
Through kinked-demand theories, there are two types of price strategies: Match
price changes and ignore price changes
Collusion is an attempt to suppress competition while on the other hand, the

cartel is a group of the market who concurrently raise the market price or decrease
market output. This will lead us to our third oligopoly model which is cartel and collusion.
The goals of these two are: to consider circumstances that will retain cartels, determine
the policy to prevent cartels, and consider how cartels will stay together. This is an
example of a type of collusion:
Price-leadership model motivates oligopolists to coordinate prices without
engaging in outright collusion (secret meetings). This concept mainly focuses on the
largest or most efficient industry firm and then begin to race prices based on them.

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Type of 2. Standardized 7. Unique-no 12. 17. Standardized

Price Setting 3. None 8. Considerable 13. Some, but 18. Limited by

When does the firm shut down?

In the long run, these are the possibilities:

Collusion is an attempt to suppress competition while on the other hand, the

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