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Market structures1

Market structures1






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Market structures1 Market structures1 Presentation Transcript

  • Market structures 1.Perfect Competition 2. Monopoly 3. Oligopoly 4. Monopolistic Competition
    • 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
    • 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.
  • Features of the four market structures
    • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Perfect Competition
    • The long run
      • long-run equilibrium of the firm
        • all supernormal profits competed away
        • LRAC = AC = MC = MR = AR
  • 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
  • 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?