Market Structures

ECON127 L4

Types of Market structures

• Perfect competition

• Monopoly

• Monopolistic competition

• Oligopoly

Factors to classify markets

• number of firms - (one firm - monopoly, lots - perf)

• freedom of entry to industry - (cost/ start up costs, how easy to enter)

• nature of product

• nature of demand curve

Learn this table and extra info

• More competition - good for consumer

• Less competition - less good for consumer but good for firm

• How easy to enter marketplace

  Monopoly - Not easy

  Oligopoly - Not as easy to enter the market

  Easy to hardest

• Undifferentiated - not much differences between the products

  Differentiated etc - mono- is not the same as anything else

  Olgi - Is but also isnt in the same time

• Quality of cabbage wont be the same and type but cabbage is a cabbage

• Perf - have to take the price that is given, cant really change

  Monopolistic -

  
  

  Less control to more control

   

  All apart from perfect competition - price making takes place.

  Perfect competition cannot control the price

Perfect competition assumptions

• Firms are price takers

• Freedom of entry

• Identical products

• Perfects knowledge as there are lots of firms already

extra info

Best thing for consumer

Worst for firms to make money

Anyone can open up a company

Selling identical things

 

Most level of competition you can have

The short term equilibrium of industry and firm under perfect competition

A - Whole industry (whole market) all the firms

Pe = equilibrium price for item

 

B - One company

Not selling millions but thousands, makes up the millions of the industry

If u deviate, no one will buy, if u go below the price, you will make a loss

AR is equal on both

Best thing AR = MC

Qe is the profit maximising value

 

If u choose a smaller price, would attract the market, but lose money on every item u sell so therefore losing overall.

Cant be sustained for a long time at all

Put out of business in long term

 

In short term there would be profit but long term not sustained

Shaded blue section- revenue> cost = short term

The short term supply curve

If they decide P1 is equib

Hypothetical demand

In the short term - it is profit maximisation even though you might not get a lot of money but it is the best price could be picked.

If D2 is what dictates the demand , P2 would be the Price, less quantity, but

Dictating short term supply

In the long run of perfect competition

• All supernormal profits are competed away

• LRAC = AC = MC = MR = AR

Businesses dont have control over the price

Eg - A company started making more profit than others, other firms would enter the market, take all the market away from you, so profit will decrease.  So profits will get back to normal. Therefore go back to equib.

One company high profit - short term will then convert to the same profit in long term.

 As new firms enter, more supply , therefore will be lower price as more supply.

The benefits and negatives of perfect competition

Benefits

• price = marginal cost - (allocative efficiency)

• firms must be efficient to survive - (productive efficiency)

• least cost output - production at bottom of LRAC

• prices kept low

• most efficient outcome for the market

• no waste, efficient in supply and demand, no excess

Negatives

• incompatibility of economies of scale

• good for customer as cheap - worse for business

• not the best for own profit

What is a Monopoly?

One producer supplying the whole market. No competition at all. It is the whole industry.

How the monopoly maintain their power

• Economies of scale: natural monopoly - only one place can supply specific item like oil

• Absolute cost advantages: superior tech - producing smth new, input controls etc.

• High switching cost, legal protection, M&A

• 
  

How does the monopolist’s demand curve look like

• downward sloping

• MR below AR

• equib output =MC = MR

• industry = market bc only one firm

Finding equib price and profit from demand curve

AR>AC therefore profit is made. Profit made in the long term is the blue shaded section. The best that the monopoly can do.

Advantages and disadvantages of a monopoly

Advantages

• Economies of scale

Disadvantages

• High prices/low output: short run and long run

• lack of incentive to innovate

GRAPH MISSRD

another graph

What is monopolistic competition?

• quite a large number of firms

• freedom of entry

• product differentiation

The short run equilibrium of the firm under monopolistic competition

Not the only company, firm decides the price. Depending on the quantity, thats the price you set. Blue shaded region = profit. Not as extreme as monopoly.

The long run equilibrium of the firm under monopolistic competition