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competition
Market Structures
Market structure refers to the number and
size of buyers and sellers in the market for
a good or service.
A market can be defined as a group of
firms willing and able to sell a similar
product or service to the same potential
buyers.
Classification of market
structures
4 broad categories –
2. Perfect competition
3. Monopoly
4. Monopolistic competition
5. Oligopoly
Major features that determine
market structure
Number of sellers
Product differentiation
TR = (P X Q)
Revenue of a Competitive Firm
MR =∆TR/ ∆Q
Revenue of a Competitive Firm
P
* E P* A AR = MR
C B
D
Q Q* Q
Q*
Industry Firm
• Firm has to take the price as given by the market
•At the ruling price firm can sell any amount of
its product
•Demand is perfectly elastic
•AR is parallel to X axis
•Equilibrium is at pt. E where demand is equal to
supply
• This determines the price P*
• This price is taken by the individual firm
Equilibrium for the firm is where MR =MC
and MC curve cuts MR curve from below.
I.e. at point A
MC ATC
Profit
P P = AR = MR
ATC
0 Q Quantity
Profit-maximizing quantity
Measuring Profit in the Graph for the
Competitive Firm...
Price A Firm with Losses
MC ATC
ATC
P P = AR = MR
Loss
0 Q Quantity
Loss-minimizing quantity
Long run equilibrium of the firm and
industry
All factors are variable in the long run
Hence all costs are variable
Firm can change the plant and adjust the
capacity according to the requirements of
production
If profits are supernormal, more firms enter
the market and vice versa.
Entry and exit of firms is possible
Long run equilibrium of the firm and
industry
If the number of firms increase, ( because they
might be attracted towards the supernormal
profits ), or the same firms increase their
production, the supply curve moves to the right.
At the same demand, this results in a decrease in
price.
If the number of firms decrease, ( because of
losses ), or the same firms decrease production,
the supply curve shifts to the left. At the same
demand, this results in an increase in price.
Long run equilibrium of the firm and
industry
Hence, in the long run, supernormal profit is not
possible and all firms have to survive at a Normal
profit.
This means that all the firms will stop production
at the point where AC is lowest. This is also the
price they will sell the goods at.
Hence in the long run, firms have no incentive to
expand or contract their production capacity or
leave the industry and new firms have no
incentive to enter the industry.
MR = MC in long run as well
Under perfect competition, since MR =AR, in
equilibrium also MC is equal to AR
Price must also equal AC.
P > AC => supernormal profits
New firms enter the market
If there are losses, firms will leave the market.
Thus in the long run equality of P and AC
becomes a necessary condition.
Thus,
P(AR) =MR =AC = MC in the long run
Long run
Economic Efficiency
The fundamental economic problem is a
scarcity of resources.
Definition of Efficiency
Efficiency is concerned with the optimal
production and distribution or these scarce
resources.
Types of Efficiencies
There are different types of efficiency
1. Productive efficiency.
This occurs when the maximum number of goods and
services are produced with a given amount of inputs. This
will occur on the production possibility frontier.
ON the curve it is impossible to produce more goods
without producing less services.
Productive efficiency will also occur at the lowest point
on the firms average costs curve
Types of Efficiencies
2. Allocative efficiency
This occurs when goods and services are
distributed according to consumer preferences.
An economy could be productively efficient but
produce goods people don’t need this would be
allocative inefficient.
Allocative efficiency occurs when the price of the
good = the MC of production
Types of Efficiencies
3. X inefficiency:
This occurs when firms do not have
incentives to cut costs, for example a
monopoly which makes supernormal
profits may have little incentive to get rid
of surplus labor. Therefore a firms average
cost may be higher than necessary
Types of Efficiencies
4. Efficiencies of scale
This occurs when the firms produces on the
lowest point of its Long run average cost
and therefore benefits fully from
economies of scale
Types of Efficiencies
5. Dynamic efficiency This refers to
efficiency over time for example a Ford
factory in 1920 would be very efficient for
the time period but would now be
inefficient by comparison therefore it is
necessary for firms to constantly introduce
new technology and reduce costs over time
Types of Efficiencies
6. Social efficiency
This occurs when externalities are taken
into consideration and the social cost of
production (SMC) = the social benefit
(SMB)
Types of Efficiencies
7. Technical Efficiency
Optimum combination of factor inputs to
produce a good: related to productive
efficiency.
Efficiency of Perfect
Competition
1. Allocative Efficient. This is because P = MC
2. Productive Efficient. This is because firms
produce at the lowest point on the AC
3. X Efficient. Competition between firms will
act as a spur to increase efficiency
4. Resources will not be wasted through
advertising because products are homogenous
5. Normal profit means consumers are getting the
lowest price.
This also leads to greater equality in society
Disadvantages of Perfect Competition