V Market structure Ȃ identifies how a market

is made up in terms of:

g ~he number of firms in the industry
g ~he nature of the product produced
g ~he degree of monopoly power each firm has
g ~he degree to which the firm can influence price
g Profit levels
g Firmsǯ behaviour Ȃ pricing strategies, non-price competition, output
levels
g ~he extent of barriers to entry
g ~he impact on efficiency
 Perfect Pure
Competition Monopoly

More competitive (fewer imperfections)

 Market Structure
Perfect Pure
Competition Monopoly

Less competitive (greater degree

of imperfection)
 Market Structure
Pure
Perfect
Monopoly
Competition

Monopolistic Competition Oligopoly Monopoly

The further right on the scale, the greater the degree

of monopoly power exercised by the firm.
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
V ©hat is a competitive market?
V How do competitive markets decide the
quantity of production?
V ©hen do firms decide to shut down and
exit the market?
V How does the firmǯs behavior determine
the firmǯs SR and LR supply curves?
V ~here are many buyers and sellers in the
market
V ~he goods offered by the sellers are
largely similar or identical
g uyers and sellers are price takers
V Firms can freely enter or exit the market
V Complete information
V Firm must be small relative to the size of the
market
V Individual firms cannot affect the market
price
V ~he objective of the firm is to maximize
profits
V As the price is set in the market as a whole,
the individual firm adjusts its output to
maximize its profit at the g|
 market price
V ©


V
 
£ ~R and ~C
£ MR and MC
V ©


V 



£ Abnormal profit
£ Normal profit
£ Losses
V Profit maximization occurs by producing
the quantity at which MR=MC
V ~he firmǯs MC curve determines the
quantity of the good that the firm is willing
to supply at any given price
V ~herefore, MC curve becomes the supply
curve of the firm
ñ 
 º

  
ñD



ñu
  
ñ
D
u

î î



 


(a) I ustr ( ) Firm

V Long-run equilibrium of the firm

g all supernormal profits competed away

g ×

 

    
J
  
  
   

ñ
D


×

ñD D D
ñ× × ×


î î
×



 


(a) I ustr ( ) Firm

-   
  

 

 

         

î

V Shutdown refers to a SR decision not to produce
anything during a specific period of time because
of current market condition.
V If the Price(P) falls below average variable
cost(AVC) => (P<AVC ), the firm is better off
shutting down.
V ~otal loss is not just a fixed total cost, but also
involves a part of total variable cost.
V whiteboard
V ~utorial Question N0. 5
D. ©hat is meant by a competitive market?
2. ©hat 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.