Description
It explains the market structures viz. perfect competition, monopoly, oligopoly, monopolistic competition.
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
Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price
Perfect competition Monopolistic competition
Very many Many / several
Unrestricted
Homogeneous (undifferentiated)
Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)
Unrestricted
Differentiated
Undifferentiated Oligopoly Few Restricted or differentiated
Monopoly
One
Restricted or completely blocked
Unique
?
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
P
S
£
MC
AC
Pe
AR AC
D = AR = MR
D
O
Q (millions)
O
Qe Q (thousands)
(a) Industry
fig
(b) Firm
Short-run shut-down point
P
S
Rs
MC
AC
AVC
P2 D2
AR2
D2 = AR2 = MR2
O
Q (millions)
O
Q (thousands)
(a) Industry
fig
(b) Firm
Long-run equilibrium under perfect competitionNew firms enter Profits return Supernormal profits
to normal
P
S1 Se LRAC P1 PL AR1 D1 DL
£
ARL
D
O
Q (millions)
O
QL Q (thousands)
(a) Industry
fig
(b) Firm
Perfect Competition
The long run
?
?
long-run equilibrium of the firm
?
all supernormal profits competed away
?
LRAC = AC = MC = MR = AR
Rs
Long-run equilibrium of the firm under perfect competition (SR)MC
(SR)AC
LRAC
DL AR = MR
LRAC = (SR)AC = (SR)MC = MR = AR
O
Q
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?
doc_692140728.pptx
It explains the market structures viz. perfect competition, monopoly, oligopoly, monopolistic competition.
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
Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price
Perfect competition Monopolistic competition
Very many Many / several
Unrestricted
Homogeneous (undifferentiated)
Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)
Unrestricted
Differentiated
Undifferentiated Oligopoly Few Restricted or differentiated
Monopoly
One
Restricted or completely blocked
Unique
?
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
P
S
£
MC
AC
Pe
AR AC
D = AR = MR
D
O
Q (millions)
O
Qe Q (thousands)
(a) Industry
fig
(b) Firm
Short-run shut-down point
P
S
Rs
MC
AC
AVC
P2 D2
AR2
D2 = AR2 = MR2
O
Q (millions)
O
Q (thousands)
(a) Industry
fig
(b) Firm
Long-run equilibrium under perfect competitionNew firms enter Profits return Supernormal profits
to normal
P
S1 Se LRAC P1 PL AR1 D1 DL
£
ARL
D
O
Q (millions)
O
QL Q (thousands)
(a) Industry
fig
(b) Firm
Perfect Competition
The long run
?
?
long-run equilibrium of the firm
?
all supernormal profits competed away
?
LRAC = AC = MC = MR = AR
Rs
Long-run equilibrium of the firm under perfect competition (SR)MC
(SR)AC
LRAC
DL AR = MR
LRAC = (SR)AC = (SR)MC = MR = AR
O
Q
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?
doc_692140728.pptx