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L EC T U R ER : M SC L E T H A N H T H U Y
MARKET STRUCTURES
I. Market and its classification
1. Definition:
An economy that allocates resources through the
decentralized decisions of many firms and
households as they interact in markets for goods
and services
Comments
 Firms decide whom to hire and what to make.
 Households decide which firms to work for and what
to buy with their incomes.
 These firms and households interact in the
marketplace, where PRICES and self-interest guide
their decisions

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2. Its classification
- Perfectly competitive market
- Monopoly
- Monopolistic competition
- Oligopoly
The four types of market structure
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Economists who study industrial organization divide markets into four types:
Monopoly, Oligopoly, Monopolistic competition, and Perfect competition.
Compare markets in sense of:
- Market power
- Barrier to entry
- Non-price competition

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II. Perfectly Competitive Market
1. Definition:
A market with many buyers and sellers trading
identical products so that each buyer and seller is a
price taker
2. Properties of Perfectly Competitive Market
 Market with many buyers and sellers
 Trading identical products
 Each buyer and seller is a price taker
 Firms can freely enter or exit the market
 Perfect (transparent) information
3. Demand curve and marginal revenue curve of
perfectly competitive firm

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4. P and Q to Maximize profit
 Produce quantity where total revenue minus total
cost is greatest
 Compare marginal revenue with marginal cost
If MR > MC – increase production
If MR < MC – decrease production
If MR = MC - profit-maximizing level of output
Profit Maximization& Competitive Firm’s Supply Curve
5. Break-even point & shut-down point
 Shutdown
 Short-run decision not to produce anything
During a specific period of time
Because of current market conditions
 Firm still has to pay fixed costs
 Exit
 Long-run decision to leave the market
 Firm doesn’t have to pay any costs
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Profit Maximization& Competitive Firm’s Supply Curve
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In this case
TR = SP*AQ*O
TC = S OCBQ*
Π = SP*ABC
Then
TR = SP*AQ*O
TC = SP*AQ*O
Π = 0
Then:
TR = S P*BQ*O
TC = SOCAQ*
Loss = SP*CAB

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In this case,
TR = SOP*AQ*
TC = SOCBQ*
AVC = EQ*, AFC = EB
VC = SOFEQ*, FC = SFCBE
Then:
-Continue doing
business Loss
SP*CBA,<SP*AEF
-Shut-down Lose SFCBE
 The firm’s short-run decision to shut down
 TR = total revenue
 VC = variable costs
 Firm’s decision:
 Shut down if TR<VC (P<AVCmin)
TR = SP*AQ*O
TC = SOCBQ
Then:
-Continue doing
business
 Loss S P*CBA
-Shut-down
 Lose S ECBF

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6. Competitive firm’s short-run supply curve
 The portion of its marginal-cost curve
 That lies above average variable cost
The competitive firm’s short-run supply curve
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Costs
In the short run, the competitive firm’s supply curve is its marginal-cost curve (MC)
above average variable cost (AVC). If the price falls below average variable cost, the firm
is better off shutting down.
Quantity0
ATC
MC
AVC
1. In the short run, the
firm produces on the
MC curve if P>AVC,...
2. ...but
shuts down
if P<AVC.
7. Producer’s Surplus (PS)
Definition:
Producer surplus is the amount producers receive for
a good minus their costs of producing it.

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PS = TR – VC
= TR – ( TC – FC)
= TR – TC + FC
= Π + FC