Economia politica gregory mankiw

Microeconomics Topic 7: “Contrast market outcomes under monopoly and competition.” Reference: N. Gregory Mankiw’s Principles of Microeconomics, 2nd edition, Chapter 14 (p. 291-314) and Chapter 15 (p. 315-347). Types of Market Structure A market is a set of sellers and buyers whose behavior affects the price at which a good is sold. In this review we'll see that the type of market a firm operates in has a large impact on the firm's behavior. Firms have no control over price under perfect competition. But firms have tremendous control over price in a monopoly setting. Economists describe different types of markets by: (1) the number of firms (2) whether the products of different firms are identical or different (3) how easy it is for new firms to enter the market. The four major types of markets can be viewed on a continuum. Figure 7-1

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Perfect competition is at one extreme with many small firms selling identical products. Monopoly is at the other extreme with just one firm. The intermediate cases are monopolistic competition (which involves many small sellers producing slightly differentiated products) and oligopoly (which involves a small number of large firms). Most U.S. firms operate under monopolistic competition (e.g., novels, movies, clothing, etc.) or oligopoly (tennis balls, crude oil, automobiles, etc.). However, this review will focus on the two extremes: perfect competition and monopoly. There are three conditions required for perfect competition. (1) Numerous small firms and customers. The decisions of individual producers and buyers do not affect the price of the good.

(2) Homogeneity of product. The products offered by sellers are identical. For example, wheat of a particular grade is homogeneous (while ice cream is not). If the product is homogeneous, consumers don't care from which firm they buy the good because their products are identical. (3) Freedom of entry and