Market Structures Perfect Competition Alternative Market Structures Classifying

Market Structures Perfect Competition

Alternative Market Structures Classifying markets by degree of competition number of firms freedom of entry to industry nature of product nature of demand curve The four market structures perfect competition monopoly monopolistic competition oligopoly

Features of the four market structures

Perfect Competition Assumptions large number of firms are price takers freedom of entry and exit identical products perfect knowledge Distinction between short and long run Short-run equilibrium of the firm P = MC possible supernormal profits

Short-run equilibrium of industry and firm Firm is a price taker. Price is given by the market. P O Qe Q (millions) (a) Industry

Loss minimising under perfect competition Loss is minimised where MC = MR. P S D O O Q (millions) (a) Industry Q (thousands) (b) Firm

Short-run shut-down point P MC S AC AVC D 2 = AR 2 P 2 = MR 2 D 2 O O Q (millions) (a) Industry Q (thousands) (b) Firm

Deriving the short-run supply curve P =S D 1 = MR 1 D 2 = MR 2 D 3 = MR 3 O Q (millions) (a) Industry O Q (thousands) (b) Firm

Perfect Competition Short-run supply curve of industry Long-run equilibrium of the firm all supernormal profits competed away

Long-run equilibrium under perfect competition New firms enter Supernormal profits P Profits return to normal MC O O Q (millions) (a) Industry QL Q (thousands) (b) Firm

Long-run equilibrium of the firm O Q

Perfect Competition Short-run supply curve of industry Long-run equilibrium of the firm all supernormal profits competed away long-run industry supply curve

Various long-run industry supply curves under perfect competition P S 1 D 1 O (a) Constant industry costs Q

Various long-run industry supply curves under perfect competition P S 1 a D 1 O Q (b) Increasing industry costs: external diseconomies of scale

Various long-run industry supply curves under perfect competition P S 1 a D 1 O (c) Decreasing industry costs: external economies of scale Q

Perfect Competition Short-run supply curve of industry Long-run equilibrium of the firm all supernormal profits competed away long-run industry supply curve Incompatibility of economies of scale with perfect competition

Perfect Competition Short-run supply curve of industry Long-run equilibrium of the firm all supernormal profits competed away long-run industry supply curve Incompatibility of economies of scale with perfect competition Does the firm benefit from operating under perfect competition?