Market Structure Byme

8/8/2019 Market Structure Byme

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Market structure identifies how a marketis made up in terms of: The number of firms in the industry

The nature of the product produced The degree of monopoly power each firm has

The degree to which the firm can influence price

Profit levels

Firms behaviour pricing strategies, non-price competition, output

levels The extent of barriers to entry

The impact on efficiency


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More competitive (fewer imperfections)

PerfectCompetition

PureMonopoly


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Market Structure

Less competitive (greater degreeof imperfection)

PerfectCompetition

PureMonopoly


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Market StructurePerfect

Competition

PureMonopoly

Monopolistic Competition Oligopoly Monopoly

The further right on the scale, the greater the degreeof monopoly power exercised by the firm.


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Features of the four market structuresFeatures of the four market structures

Type ofmarket

Numberof firms

Freedom ofentry

Nature ofproduct

Examples Implications fordemand curve

faced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:

firm is a price taker

Monopolistic

competition

Many /

severalUnrestricted Differentiated Builders,

restaurants

Downward sloping,but relatively elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, electricalappliances

Downward sloping.

Relatively inelastic(shape depends onreactions of rivals)

Monopoly One Restricted or

completely

blocked

Unique

Local water

company, trainoperators (over

particular routes)

Downward sloping:

more inelastic thanoligopoly. Firm has

considerable

control over price


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Type ofmarket

Numberof firms

Freedom ofentry

Nature ofproduct


faced by firm

Perfect

competition

Very


(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:


Monopolistic

competition

Many /


restaurants



Undifferentiated

or differentiated

Cement


Downward sloping.



completely

blocked

Unique

Local water


particular routes)

Downward sloping:


considerable

control over price


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Type ofmarket

Numberof firms

Freedom ofentry

Nature ofproduct


faced by firm

Perfect

competition

Very


(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:


Monopolistic

competition

Many /


restaurants



Undifferentiated

or differentiated

Cement


Downward sloping.



completely

blocked

Unique

Local water


particular routes)

Downward sloping:


considerable

control over price


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Type ofmarket

Numberof firms

Freedom ofentry

Nature ofproduct


faced by firm

Perfect

competition

Very


(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:


Monopolistic

competition

Many /


restaurants



Undifferentiated

or differentiated

Cement


Downward sloping.



completely

blocked

Unique

Local water


particular routes)

Downward sloping:


considerable

control over price


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Type ofmarket

Numberof firms

Freedom ofentry

Nature ofproduct


faced by firm

Perfect

competition

Very


(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:


Monopolistic

competition

Many /


restaurants



Undifferentiated

or differentiated

Cement


Downward sloping.



completely

blocked

Unique

Local water


particular routes)

Downward sloping:


considerable

control over price


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Type ofmarket

Numberof firms

Freedom ofentry

Nature ofproduct


faced by firm

Perfect

competition

Very


(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:


Monopolistic

competition

Many /


restaurants



Undifferentiated

or differentiated

Cement


Downward sloping.



completely

blocked

Unique

Local water


particular routes)

Downward sloping:


considerable

control over price


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What is a competitive market?

How do competitive markets decide the

quantity of production?When do firms decide to shut down and

exit the market?

How does the firms behavior determinethe firms SR and LR supply curves?


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There are many buyers and sellers in the

market

The goods offered by the sellers arelargely similar or identical

Buyers and sellers are price takers

Firms can freely enter or exit the market Complete information


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Firm must be small relative to the size of themarket

Individual firms cannot affect the marketprice

The objective of the firm is to maximizeprofits

As the price is set in the market as a whole,the individual firm adjusts its output tomaximize its profit at the given market price


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Whiteboard

2 Approaches:TR andTC

MR and MC


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Whiteboard

3 conditions:Abnormal profit

Normal profitLosses


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Profit maximization occurs by producing

the quantity at which MR=MC The firms MC curve determines the

quantity of the good that the firm is willing

to supply at any given price Therefore, MC curve becomes the supply

curve of the firm


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O O

(a) I ustr

P

P1

Q (millions)

S

D1

( ) Firm

D1 = MR1

MC

P2D2= MR2

D2

P3

D3 = MR3

D3

Q (thousands)

a

b

c

= S


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Long-run equilibrium of the firm

all supernormal profits competed away

LRAC = AC = MC = MR = AR


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O O

(a) I ustr

P

Q (millions)

1

D

( ) Firm

LRAC

PL

P1

QL

Se

AR1 1

ARL L

Q (thousands)

New firms enter Supernormal profitsProfits return

to normal


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QO

( R)AC

( R)MC

LRAC

AR MR

L

LRAC ( R)AC ( R)MC MR AR


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Shutdown refers to a SR decision not to produce

anything during a specific period of time becauseof current market condition.

If the Price(P) falls below average variable

cost(AVC) => (P


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whiteboard


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Tutorial Question N0. 5


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1. What is meant by a competitive market?2. What the characteristic of competitive market? Explain.

3. Draw the 3 condition of firm in SR equilibrium.4. Under what conditions will a firm shut down temporarily?

Explain.5. Explain the advantages and disadvantages of competetive

market.

Documents

Market Structure Byme