Four Market Structures
- Pure competition (least common)
- Monopolistic competition (imperfect competition)
- Oligopoly (imperfect competition)
- Monopoly (least common and imperfect competition)
Differentiating Characteristics
- Number of firms
- Type of product
- Ease of entry
- Market power or price control
Monopoly Characteristics
- High market power (Price Maker)
- One firm
- Blocked entry
- Unique product
i. e. local utilities
Oligopoly Characteristics
- Interdependence (Price Maker)
- A few large firms
- High barriers to entry
- Homogeneous or differentiated products
i. e. steel, oil, automobiles
Monopolistic Competition
- Limited market power (Price Maker)
- Large number of firms
- Low barriers to entry/exit
- Differentiated products
i. e. restaurants, hotels
Pure (perfect) Competition
- No market power (Price Taker)
- Large number of firms
- No barriers to entry/exit
- Homogeneous product
Have perfect information
i.e. farmers
Pure Competition Demand (individual firms)
Demand is perfectly elastic at the market price
Pure Competition Demand (market)
downsloping curve
Marginal - Average - Total Revenue - Price
Price = MR = AR TR = Price * quantity
How to Maximize Profit
Maximize economic profit by adjusting output
How to Determine Level of Output
- Total Revenue - Total Cost
2. MR = MC (any point where MR > MC)
Break Even Point
When a firm makes a normal profit
Maximize Profit
MR = MC
Greatest different between TR and TC
- produce the last full unit for which MR exceeds MC
- Applies to all industries
- Also called P = MC in pure competition only
Calculating Economic Profit
Quantity times price minus average total cost
Q * (P - ATC)
Minimize Loss
Where MC = MR
- As long as price exceeds minimum AVC and less than ATC
Shutdown
MC is greater then minimum AVC
Law of One Price
Where this is one price for a commodity if transaction costs are zero
Perfect Information
Know the exact the price in a competitive market
Short-run Supply Curve
The part of the MC curve that is above the AVC
Equilibrium Price for Market
Find an individual supply schedule and multiply that by the number of firms in the industry
* This assumes that all industries have the same supply schedule
Shutdown in Short-run
Firms can not shut down in the short run - they can stop producing to minimize losses, but they won’t exit until the long-run
Long-run Characteristics
- Entry and exit of firms
- Identical costs of all firms
- Constant-cost industry
- Product price will be equal to minima average total cost
Constant-Cost Industry
Industry expansion and contraction will not affect resource prices or production costs
Horizontal line - perfectly elastic
Increasing-Cost Industry
(Most industries)
ATC curves shift upwards as the industry expands production
