“Market Structure” refers to the competitive characteristics
of a market
–
The numbers of buyers and sellers
–
The ease of starting up in a market or leaving
it
–
The information and choice that is available to
buyers
–
The control that suppliers have over the price
they charge
–
How special or common the good or service is
–
How much governments interfere in the market
–
To make it easier to analyse any market,
economists have created four models or classic types of market:
–
Perfect competition
–
Monopoly
–
Oligopoly
–
Monopolistic competition
Assumptions of the Perfectly Competitive Model
•
Many buyers and sellers
•
Buyers and sellers are price takers (the market
sets the price)
•
The service provided is homogenous
•
Freedom of entry and exit for firms
•
Both buyers and sellers have perfect knowledge
of the market
•
No government interference
Market Equilibrium Price and Quantity
Individual Firm’s Demand Curve
•
The firm will supply the quantity of goods that
maximise profits.
•
Profits are maximised at MC = MR
•
As MR is also the price, the firm will supply
the quantity where MC crosses the price.
Short-run and long-run production
•
In the short-run, a firm will produce at a loss
so long as all variable costs and (hopefully) some fixed costs are covered by
the price.
•
In the long-run, a firm will not produce at a
loss, it will go out of business
•
In the short-run, it is possible to make
supernormal profits
•
In the long-run, new firms will enter the
industry, tempted by the supernormal profit.
•
This will shift the industry supply curve to the
right, and push down the price.
•
Price will fall until only normal profits (a
cost) are made.
•
The perfectly competitive firm will be in
long-run equilibrium.
Effect of New Market Entrants
•
In
a monopoly, there is only one firm supplying the good or service.
•
The
monopoly supplier is a price maker.
•
The
industry demand curve is the firm’s demand curve, and downward sloping.
•
Changes
in price will change the quantity demanded.
•
As
each price is charged for all goods, the price at each point is the average
revenue.
•
Because
the price of all goods must be reduced to sell more, marginal revenue will fall
more steeply than average revenue.
Revenue Curves for a Monopoly
Maximising Profits
•
As
with perfect competition, the monopolist will make the greatest profit when
MR = MC
•
This
determines the quantity produced.
•
The
price is found from the demand curve, which shows the price consumers will pay
for that quantity.
Maximising Profits
Monopoly
•
The
monopolist makes supernormal profits.
•
To
keep competitors out, there must be barriers to entry.
•
These
can be from governments, from a natural monopoly, or from economies of scale.
Oligopoly
•
A
small number of firms sharing most of the market.
•
Barriers
to entry.
•
Firms
are price makers but ….
•
A
price change by one firm will affect the sales of the others; they are
interdependent.
–
The
oligopolist believes that rival firms will follow a price cut by cutting their
prices.
–
The
oligopolist believes that rival firms will not follow a price rise.
•
Firms
can compete for market share
or
•
Work
together (collude) for maximum profits
(NB
collusion is illegal in the EU and USA)
•
Whichever
strategy is chosen, firms will tend to concentrate on non-price competition:
–
Advertising
–
A
strong brand identity
–
Loyalty
cards
–
Special
offers
Monopolistic Competition
•
Many firms
•
Freedom of entry
•
The goods/services produced are all different
but of a similar type
•
Some control over prices, for example the firm
can position itself at the luxury end or the cheap end of a market (product
differentiation)
•
No control over the market, no effect on the
overall market price
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