Market Structure
Types of Market Structures
•
The four market structures
▫perfect competition
▫monopoly
▫monopolistic competition
Categories of Market Structures
•
Classifying markets (by degree of competition)
▫ number of firms
▫ freedom of entry to industry
free, restricted or blocked?
▫ nature of product
homogeneous or differentiated?
▫ nature of demand curve
Features of the four market structures
Perfect Competition
•
Perfect competition
An industry structure
in which there are many firms, each small
relative to the industry, producing
virtually identical products and in which
no firm is large enough to have any
control over prices. In perfectly
Perfect Competition
•
Assumptions
▫firms are price takers
▫freedom of entry of firms to industry
▫identical products
▫perfect knowledge
•
Distinction between short and long run
Perfect Competition
•
Short-run equilibrium of the firm
▫ Price
given by market demand and supply
▫ Output
where P = MC
▫ Profit
(AR – AC) × Q
Short-run equilibrium of industry and firm under
perfect competition (profit maximizing)
Short-run equilibrium of industry and firm under
perfect competition (profit maximizing)
O
$
(b) Firm
Q
(thousands)
O
(a) Industry
P
Q
(millions)
S
D
P
eMC
AR
D = AR
Efficiency Condition
•
An efficient allocation of resources is
achieved if it is not possible to increase
society's overall level of satisfaction by
producing more of one good and less of
another good.
▫When an efficient allocation of the
resources has been attained, it is
Efficiency Condition cont’d
•
Efficiency is achieved if:
P = MC
•
Price: The price that buyers are willing to pay for
a good indicates the satisfaction generated from
producing and consuming the good.
▫ It is a signal from the buyers to the sellers
telling firms the marginal benefit of consumers
in the market
•
Marginal Cost: The marginal cost of production
indicates the additional cost of the resources
used up in production.
▫If P > MC then the message is being sent
producers that more output is demanded .
Society can increase overall satisfaction by producing
Loss minimising under perfect competition
Loss minimising under perfect competition
Q
eP
1D
1= AR
1= MR
1AR
1O
O
(a) Industry
P
$
Q
(millions)
S
D
(b) Firm
MC
AC
AC
Short Run Shut down Point cont’d
Break-even price
If the market
price is just
equal to the
minimum point
on the ATC
curve, the firm
will receive a
level of
economic profits
equal to zero,
MC and the short-run supply curve
Since the portion of the
MC curve that lies
above the AVC curve
indicates the quantity
of output supplied at
each price, it is the
Perfect Competition
•
Short-run equilibrium of the firm (cont.)
▫short-run supply curve of firm
the
MC
curve
•
Short-run supply curve of industry
Perfect Competition
•
The long run
▫long-run equilibrium of the firm
Long-run equilibrium under perfect
competition
Long-run equilibrium under perfect
competition
fig
