Market Structures

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Chapter 10
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Perfect Competition

Perfection is something that we can just imagine. But although perfection doesnt exist, that doesnt stop us from imagining what something perfect looks like because it is a benchmark to compare something else to. The same holds true for market forms. Economists would like markets to strive for 5/19/12 Prepared by Mr. Festus 22

Perfect Competition

The assumptions economists make about perfectly competitive markets are:

1.

There are large numbers of buyers and sellers but no one buyer or seller can influence market price. All market participants are price takers. No collusive behaviour between firms. They act independently.
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2.

3.

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Firms demand, average revenue (AR), and marginal revenue (MR) curves One of the assumptions of a
perfectly competitive market is that no buyer or seller can influence market prices.

Because no single firm can influence the market price, the price determined by the market forces is a given for all the firms in the industry.
Prepared by Mr. Festus 44 Note that the demand curve in

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The total revenue (TR) curve

Total revenue is equal to the price of a product, times the number or products traded in the market. For any firm the price of all goods sold is the same, so there is a linear relationship between the number of products sold and total revenue. The TR curve is a straight line from the origin, and the slope will be determined by the price of the product. Marginal revenue (MR) is the slope of the TR curve. Average revenue is the slope of the line from the origin through the TR curve. This is equal to the slope of the TR curve itself. Marginal revenue is also equal to the derivative of 5/19/12total revenue function. Festus Prepared by Mr. 55 the

Profit in the short run with TR and TC curves

One way to calculate profit is to subtract total cost from total revenue.

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Short-run profit with Marginal Calculations

There is another way of determining maximum profit. This is achieved by calculating marginal revenue and marginal cost, and then comparing the two. If marginal revenue is higher than marginal cost, then the revenue gained from the last unit sold is moreMr. Festus the than 5/19/12 Prepared by 77

Short-run profit with Marginal Calculations

If marginal revenue is less than marginal cost, an increase in production will decrease profit i.e. profit is maximised when marginal revenue equals marginal cost. This is the point at which Prepared by Mr. Festus 88

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The supply curve of an Individual Firm

The supply curve of a firm is nothing more than the quantities of a product that the firm is willing to sell at different prices. Pprice is determined by the industry as a whole and the individual firm has no choice but to sell at this price or leave the industry.
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The supply curve of an Individual Firm

This part of the MC curve also forms part of the supply curve of the firm. However, no firm can exist over the long run if it makes losses. So this only holds true for the short run and if the firm can foresee an improvement in the profitability of their activities 5/19/12 Prepared by Mr. Festus over long run, otherwise 1010will it

Short-run adjustment in Market Prices

A firm will operate in the short run where marginal costs equal marginal revenue at the positively sloped part of the MC curve. For the firm to stay in business, the price must be equal to or higher than average variable costs. The point at which price equals average variable costs, is known as the shut-down point.
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If the price drops below average

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Long-run Equilibrium of the Firm

How do firms react to changes in market prices over the long run? To see this, suppose there is an increase in the market price. Then, two situations are likely to happen: On the one hand, if the existing firms are making above normal profits because prices are high, it will attract new Festus 5/19/12 Prepared by Mr. firms to the 1212

Imperfect Competition

In reality firms operate in imperfectly competitive markets. In this market structure, there is some degree of competition, but it is just not perfect like in the previous structure. Some assumptions of the perfect competitive market have to be relaxed. The differences between perfectly competitive markets 5/19/12 Prepared by Mr. Festus 1313

Imperfect Competition

While in perfect markets firms do not collude, in imperfect markets they do collude by having formal or informally. While in perfectly competitive markets all products are identical in imperfect markets product are heterogeneous. In imperfect markets brand names are important and Festus consumers 5/19/12 Prepared by Mr. 1414

Barriers to Entry

The fact that firms cannot freely enter and/or exit and industry gives rise to imperfect competition. The existence of economies of scale gives rise to greater concentrations of firms in certain industries.
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Barriers to Entry

Some of the factors that prevent free entry of new firms are the following:

There may be legal restrictions such as the number of licences that the government allows in an industry. There may be restrictions on imports. This can be achieved via import tariffs and quotas. A certain firm may be the holder of
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Different Market Structures

With a monopoly there is only one seller in an industry, but with an oligopoly, a few firms dominate business activities in a specific industry. An oligopoly is a market structure where a few firms dominate business activities in a specific industry.
Prepared by Mr. Festus Monopolistic competition1717 is

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Monopoly

A monopoly is a market structure in which (1) there is only one seller in an industry, (2) no close substitutes for the product provided by the monopolist exist, and (3) there are strong barriers to entry. There are many different types of barriers to entry:
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Short-run Equilibrium of the Monopoly

A monopoly is bound to the same technological and cost restrictions of any other firm, so the cost structure of a monopoly is identical to that discussed in Chapter 9 and in the section relating to perfectly competitive markets. In perfectly competitive markets, the making of economic profits in a specific industry will attract new firms to that industry. 5/19/12 Prepared by Mr. Festus 1919

Monopolistic Competition

This market is similar to a perfectly competitive market in three ways:

There are many buyers and sellers. Firms can enter and exit the industry easily. There are no barriers to entry.

The most important difference is that products in this market 5/19/12 Prepared by Mr. Festus 2020 structure are differentiated.

Oligopoly

An oligopoly is a market structure where a few firms dominate an industry. This may be the result of the cost structure of the industry. Legal restrictions such as patent rights, licensing policy of the government, tariffs, and economies of scale create barriers to entry and make oligopoly the norm in manufacturing. This is the reason why there is less rivalry in this market structure. Because there are only few firms in such industry they are mutually interdependent. If firms in an oligopoly collude, they decrease the 5/19/12 for all the firms involved. Prepared by Mr. Festus 2121 risks

How do these Market Structures Compare?

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Competition policy in Namibia

Perfect competition is the ideal market structure because consumers benefit from low prices created by the competition among firms. Monopolies or market dominance is strongly discouraged by governments since it can lead to inefficiencies and higher prices.
2323 Namibia isPrepared by Mr. Festus no exception and The

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