Beruflich Dokumente
Kultur Dokumente
Structures
Astha Khanna
The Degree of Competition
• Classifying markets
– number of firms
– freedom of entry to industry
– nature of product
– nature of demand curve
• The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
Features of the four market structures
Perfect Competition
• Assumptions
– firms are price takers
– freedom of entry
– identical products
– perfect knowledge
Short-run equilibrium of industry and firm
under perfect competition
P
S MC AC
P D = AR
AR
AC = MR
D
O O Qe
Q (millions) Q (thousands)
P AC
S MC
AC
D1 = AR1
P1 AR1
= MR1
D
O O Q
Q (millions) Q (thousands)
– LRAC = AC = MC = MR = AR
Long-run equilibrium of the firm under
£
perfect competition
(SR)MC
(SR)AC
LRAC
DL
AR = MR
O Q
Monopoly
• Defining monopoly
• Barriers to entry
– economies of scale
– product differentiation and brand loyalty
– lower costs for an established firm
– ownership/control of key factors
– ownership/control over outlets
– legal protection
– mergers and takeovers
– aggressive tactics
– intimidation
Monopoly
• The monopolist’s demand curve
– downward sloping
– MR below AR
• Equilibrium price and output
– Equilibrium output, where MC = MR
£ Profit maximisingMCunder monopoly
MR
O Qm Q
Monopoly
• The monopolist’s demand curve
– downward sloping
– MR below AR
• Equilibrium price and output
– Equilibrium output, where MC = MR
– Equilibrium price, found from demand curve
Profit maximisingMCunder monopoly
Total profit
AC
AR
AC
AR
MR
O Qm Q
Monopoly
• The monopolist’s demand curve
– downward sloping
– MR below AR
• Equilibrium price and output
– Equilibrium output, where MC = MR
– Equilibrium price, found from demand curve
• Profit
– Measuring profit
– Supernormal profit can persist in long run
Monopoly
• Disadvantages of monopoly
– high prices / low output: short run
– high prices / low output: long run
– lack of incentive to innovate
– X-inefficiency
• Advantages of monopoly
– economies of scale
– profits can be used for investment
– high profits encourage risk taking
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
Short-run equilibrium of the firm
under monopolistic competition
MC
AC
Ps
ACs
AR D
MR
O Qs Q
Monopolistic Competition
Long-run equilibrium of the firm
under monopolistic competition
LRMC
LRAC
PL
ARL DL
MRL
O QL Q
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
Long run equilibrium of the firm under
perfect and
monopolistic competition
LRAC
P1
P2
DL under perfect
competition
DL under monopolistic
competition
fig
O Q1 Q2 Q
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
• Non-price competition
• The public interest
– comparison with perfect competition
– comparison with monopoly
Oligopoly
• Key features of oligopoly
– barriers to entry
– interdependence of firms
P1
Industry D AR
Industry MR
O Q1 fig
Q
Oligopoly
• Key features of oligopoly
– barriers to entry
– interdependence of firms
D
P1
D
O Q1 Q
fig
Profit-maximising output under
third degree price discrimination
MC
9
7
5
DY
DX MRY MRT
O 1000 O 2000 O 3000
MRX