Reading 16: The firm and market structures

Characteristic of market structures

 

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Number of seller

Many firms Many firms

Few  firms

Single firms
Barriers to entry

Very low

Low High

Very high

Nature of substitute product

Very good substitutes

Good substitutes but differentiated Good substitutes or differentiated

No good substitutes

Nature of competition

Price only

Price makerting features Price makerting features

Advertising

Pricing power

None

Some Some to significant Significant
Demand curve Perfectly elastic Elastic, downward sloping Downward sloping Downward sloping
Example Wheat market Tooth paste Auto market

Public utility

 

 

  • Perfect competition

 

             Marginal Approach                                                             Total Approach

1

2

 

  • Profit maximizing output: MR = MC (alse P=MR : demand curve) of firm.

Equilibrium in perfect competitive market

Suppy curve:  Market = Total horizontal supply of all firm

Firm = MC curve above AVC curve

3

  • Changes in demand, entry an exit and changes in plant size

4

 

Demand increase: price increase : P1 to P2 economic profit increase Quantity increase: Q1 to Q2   new firm enter

 

5

 

Entry increase: supply increase price decrease : P0 to P1 revenue & economic profit decrease Quantity decrease: Q0 to Q1   exist firm exit.

 

 

  • Monopolistic competition

 

Downward sloping demand curve (price searcher) → highly elastic

Note that, monopolistic competition, price is greater than MC and price is greater than price in perfect competition.

/Q. Short Run. /Q. Long Run. MC. AC. MC. AC. DSR. MRSR. QSR. PSR. DLR. MRLR. QLR. PLR. Quantity. Quantity. 12.

  • Additional cost:
  • Product innovation
  • Advertising
  • Brand name