Market_Structure_11-18

Contents

• Market Structure

• Perfect Competition

• Demand Curve

• Profit Maximization

• Total Revenue, Total Cost Approach of Profit Maximization

• Marginal Revenue, Marginal Cost Approach of Profit Maximization

• Introduction to Economics (ECO-101)

Market Structure

• Definition: A market is a mechanism that brings together buyers and sellers of a good.

• Types of Market Structures:

  • Perfect Competition

  • Monopoly

  • Monopolistic Competition

  • Oligopoly

Perfect Competition

• Price Takers: Individual firms in perfect competition cannot affect market prices and have to accept the prevailing market rate.

• Homogenous Products: Products are identical across firms; consumers show no preference for one seller over another.

• Characteristics:

  • Large number of sellers and buyers.

  • Freedom of entry and exit for firms.

  • Perfect knowledge among consumers and producers.

  • No government intervention.

Profit Maximization

• Goal: The primary goal of firms in perfect competition is to maximize profits.

• Price Influence: A firm accepts the market price as given since they produce a negligible proportion of total market output.

• Market Examples: Farm commodities, stock market, and foreign exchange market.

Demand Curve in Perfect Competition

• Characteristics of Demand Curve for a Competitive Firm:

  • Perfectly Elastic: The firm’s demand curve is a horizontal line at the market price, indicating that any output produced can be sold at the market rate.

  • Average Revenue: Equal to market price (P). Both Marginal Revenue (MR) and Average Revenue (AR) are constant and equal at $131 in given data.

Total Revenue, Total Cost Approach to Profit Maximization (Short Run)

• Total Revenue (TR): Increases by a constant amount.

• Total Cost (TC): Increases due to the need for more resources as output grows, characterized by different rates of increase.

• Breakeven Point: Where TC intersects TR, indicating zero profit.

  • Profit Maximization: Achieved by producing quantity where TR exceeds TC.

Marginal Revenue and Marginal Cost Approach

• Comparison: Firms can identify profit maximization where MR equals MC.

• Normal Profit: Zero economic profit is made when total revenue covers total cost.

  • Conditions: If Price (P) exceeds Average Total Cost (ATC), firms earn economic profit, and if P is less than ATC, firms incur losses.

Monopoly

• Definition: A monopoly exists when a single firm is the sole producer of a product with no close substitutes.

• Unique Characteristics:

  • Single seller with significant control over prices.

  • Products are unique; no close substitutes.

  • Entry barriers restrict competition.

Price Maker vs Price Taker

• Monopolist: Has the ability to change prices due to control over the supply.

• Perfect Competition: Firms are price takers; they can only sell at the market price without influence.

Monopolistic Competition

• Characteristics:

  • Large number of firms with small market shares.

  • Independent pricing policies without collusion.

  • Product differentiation through variations in characteristics and advertising.

Oligopoly

• Definition: An oligopoly consists of a few large producers dominating the market.

• Product Types: Firms can produce homogenous (e.g., steel) or differentiated products (e.g., cosmetics).

• Interdependence: Firms must consider the actions of rivals in their pricing and production strategies.

Market Model Comparison

Characteristics of Market Models