Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Market structures1


Published on

Published in: Business, Technology
  • Be the first to comment

Market structures1

  1. 1. Market structures 1.Perfect Competition 2. Monopoly 3. Oligopoly 4. Monopolistic Competition
  2. 2. <ul><li>Determinants of market structure </li></ul><ul><ul><li>Number of sellers </li></ul></ul><ul><ul><li>Nature of the product – homogenous (identical), differentiated? </li></ul></ul><ul><ul><li>Freedom of entry and exit </li></ul></ul><ul><ul><li>Control over price </li></ul></ul><ul><ul><li>Non price Competition </li></ul></ul>
  3. 3. <ul><li>Types of profit : </li></ul><ul><li>Economic profit is Total Revenue less explicit and implicit costs. </li></ul><ul><li>Accounting profit is total revenue less explicit costs </li></ul><ul><li>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. </li></ul>
  4. 4. Features of the four market structures
  5. 5. <ul><li>Perfect Competition: </li></ul><ul><ul><li>Free entry and exit to industry </li></ul></ul><ul><ul><li>Homogenous product – identical - no consumer preference </li></ul></ul><ul><ul><li>Large number of buyers and sellers – no individual seller can influence price </li></ul></ul><ul><ul><li>Sellers are price takers – have to accept the market price </li></ul></ul><ul><ul><li>Perfect information available to buyers and sellers </li></ul></ul>
  6. 6. Short Run Equilibrium <ul><li>Since the firm is a price taker, he can sell any quantity at the given price. </li></ul><ul><li>This implies that his marginal revenue curve is horizontal </li></ul><ul><li>MR = Price </li></ul>
  7. 7. Perfect Competition <ul><li>Short-run equilibrium of the firm </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><ul><li>given by market demand and supply </li></ul></ul></ul><ul><ul><li>Output </li></ul></ul><ul><ul><ul><li>where P = MC </li></ul></ul></ul><ul><ul><li>Profit= revenue - cost </li></ul></ul><ul><ul><ul><li>possible supernormal profits </li></ul></ul></ul>
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. Perfect Competition <ul><li>The long run </li></ul><ul><ul><li>long-run equilibrium of the firm </li></ul></ul><ul><ul><ul><li>all supernormal profits competed away </li></ul></ul></ul><ul><ul><ul><li>LRAC = AC = MC = MR = AR </li></ul></ul></ul>
  12. 12. 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
  13. 13. Perfect Competition <ul><li>The long run </li></ul><ul><ul><li>long-run equilibrium of the firm </li></ul></ul><ul><ul><ul><li>all supernormal profits competed away </li></ul></ul></ul><ul><ul><ul><li>LRAC = AC = MC = MR = AR </li></ul></ul></ul><ul><ul><li>long-run industry supply curve </li></ul></ul><ul><ul><li>incompatibility of economies of scale with perfect competition </li></ul></ul><ul><li>Does the firm benefit from operating under perfect competition? </li></ul>