Market Structures

Perfect Competition

Alternative Market Structures

Classifying markets by degree of competition

number of firms freedom of entry to industry nature of product nature of demand curve
perfect competition monopoly monopolistic competition oligopoly

The four market structures

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) Plumbers, restaurants Cement cars, electrical appliances gas and electricity in many countries

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Perfect Competition
Assumptions
large number of firms
firms are price takers freedom of entry and exit identical products perfect knowledge

Distinction between short and long run Short-run equilibrium of the firm
P = MC

possible supernormal profits

Short-run equilibrium of industry and firm

P
S
Firm is a price taker. Price is given by the market.

MC

AC

Pe

AR AC

D = AR = MR

D O Q (millions) Qe

(a) Industry

Loss minimising under perfect competition

P
S
Loss is minimised where MC = MR.

MC

AC

AC P1 AR1

D1 = AR1 = MR1

O
Q (millions)

Qe Q (thousands)

(a) Industry

(b) Firm

Short-run shut-down point

P
S
MC AC

AVC P2 D2 AR2 D2 = AR2 = MR2

O
Q (millions)

O
Q (thousands)

(a) Industry

(b) Firm

Perfect Competition
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away

Long-run equilibrium under perfect competition

New firms enter Supernormal profits
P
S1 Se P1 PL AR1

Profits return to normal MC

LRAC D1 DL

ARL

O
Q (millions)

QL Q (thousands)

(a) Industry

(b) Firm

Long-run equilibrium of the firm under perfect competition

(SR)MC (SR)AC

LRAC

DL AR = MR

LRAC = (SR)AC = (SR)MC = MR = AR

Perfect Competition
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away long-run industry supply curve

Perfect Competition
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away long-run industry supply curve

Incompatibility of economies of scale with perfect competition

Perfect Competition
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away long-run industry supply curve

Incompatibility of economies of scale with perfect competition Does the firm benefit from operating under perfect competition?

 Thank you