Market structures1
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1. The document outlines four different market structures: perfect competition, monopoly, oligopoly, and monopolistic competition. 2. It describes the key determinants of market structure as the number of sellers, nature of products, freedom of entry and exit, and control over price. 3. Perfect competition is defined as having free entry and exit, homogeneous products, many buyers and sellers, and perfect information. Firms are price takers and seek to maximize profits by producing where price equals marginal cost.
Market structures1
- 1. Market structures 1.Perfect Competition 2. Monopoly 3. Oligopoly 4. Monopolistic Competition
- 2. Determinants of market structure Number of sellers Nature of the product – homogenous (identical), differentiated? Freedom of entry and exit Control over price Non price Competition
- 3. Types of profit : Economic profit is Total Revenue less explicit and implicit costs. Accounting profit is total revenue less explicit costs Normal profit is an implicit cost which the opportunity cost for the entrepreneur – the return that he could have earned in the next best alternative.
- 4. Features of the four market structures
- 5. Perfect Competition: Free entry and exit to industry Homogenous product – identical - no consumer preference Large number of buyers and sellers – no individual seller can influence price Sellers are price takers – have to accept the market price Perfect information available to buyers and sellers
- 6. Short Run Equilibrium Since the firm is a price taker, he can sell any quantity at the given price. This implies that his marginal revenue curve is horizontal MR = Price
- 7. Perfect Competition Short-run equilibrium of the firm Price given by market demand and supply Output where P = MC Profit= revenue - cost possible supernormal profits
- 8. Short-run equilibrium of industry and firm under perfect competition fig O £ (b) Firm Q (thousands) O (a) Industry P Q (millions) Q e S D P e MC AR D = AR = MR AC AC
- 9. Short-run shut-down point fig O O (a) Industry P Rs Q (millions) S (b) Firm MC AC Q (thousands) D 2 P 2 AR 2 D 2 = AR 2 = MR 2 AVC
- 10. Long-run equilibrium under perfect competition fig O O P £ Q (millions) Q L Q (thousands) New firms enter Supernormal profits Profits return to normal (a) Industry (b) Firm S 1 D LRAC P L P 1 S e AR 1 D 1 AR L D L
- 11. Perfect Competition The long run long-run equilibrium of the firm all supernormal profits competed away LRAC = AC = MC = MR = AR
- 12. Long-run equilibrium of the firm under perfect competition Rs Q O (SR)AC (SR)MC LRAC AR = MR D L LRAC = (SR)AC = (SR)MC = MR = AR
- 13. Perfect Competition The long run long-run equilibrium of the firm all supernormal profits competed away LRAC = AC = MC = MR = AR long-run industry supply curve incompatibility of economies of scale with perfect competition Does the firm benefit from operating under perfect competition?