Market Structures

Market Power

Ability of a buyer or seller to affect the price.

Price Taker

When firms (or buyers) take the market price as given and make their selling (or buying)

decisions accordingly.

Characteristics of Competitive Markets:

• Many Buyers and Sellers

• Homogenous Product

• Perfect Information

• Free Entry and Exit

Many Buyers and Sellers

Avoids monopsony (single buyer) and avoids monopoly (single seller)

Homogenous Product

The good is the same no matter which producer makes it.

Perfect Information

Consumers and producers have complete information on price and the

quality of a product.

Free Entry and Exit

When there are no barriers to entry.

Barriers to Entry

Cost or legal restrictions that limit the ability of firms to enter a market.

Explicit Costs

Costs where one must give up a sum of money.

Implicit Costs

Costs where one must give up the value of an alternative.

Accounting Costs

The total dollar value of all explicit costs.

Economic Costs

The total dollar value of explicit and implicit costs.

Accounting Profit

Accounting Revenue minus Accounting Cost.

Economic Profit

Accounting Revenue minus both Accounting Costs and Implicit Costs.

Price Searcher

A firm with market power that is able to change its output and affect the price. The price

searcher is able to choose from among several prices to determine which is most profitable.

Single-Price Strategy

A price searcher that must choose output and price and charge all customers that

same price.

Profit Maximization Rule

The quantity where marginal revenue is equal to marginal cost will maximize

profit (and producer surplus as well).

MR = MC

Monopoly

When there is only one firm that sells a particular good.