- 1. Market structures 1.Perfect Competition 2. Monopoly 3.
Oligopoly 4. Monopolistic Competition
2.
- Determinants of market structure
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- Nature of the product homogenous (identical),
differentiated?
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- Freedom of entry and exit
3.
- Economic profitis Total Revenue less explicit and implicit
costs.
- Accounting profitis total revenue less explicit costs
- Normal profitis an implicit cost which the opportunity cost for
the entrepreneur the return that he could have earned in the next
best alternative.
4. Features of the four market structures 5.
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- Free entry and exit to industry
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- Homogenous product identical - no consumer preference
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- Large number of buyers and sellers no individual seller can
influence price
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- Sellers are price takers have to accept the market price
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- Perfect information available to buyers and sellers
6. Short Run Equilibrium
- Since the firm is a price taker, he can sell any quantity at
the given price.
- This implies that his marginal revenue curve is horizontal
7. Perfect Competition
- Short-run equilibrium of the firm
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- given by market demand and supply
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- possible supernormal profits
8. Short-run equilibrium of industry and firm under perfect
competition fig O (b)Firm Q(thousands) O (a)Industry P Q(millions)
Q e S D P e MC AR D = AR = MR AC AC 9. Short-run shut-down point
fig O O (a)Industry P Rs Q(millions) S (b)Firm MC AC Q(thousands) D
2 P 2 AR 2 D 2= AR 2 = MR 2 AVC 10. Long-run equilibrium under
perfect competition fig O O P Q(millions) Q L Q(thousands) New
firms enter Supernormal profits Profits return to normal
(a)Industry (b)Firm S 1 D LRAC P L P 1 S e AR 1 D 1 AR L D L 11.
Perfect Competition
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- long-run equilibrium of the firm
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- all supernormal profits competed away
12. Long-run equilibrium of the firm under perfect competition
RsQO (SR)AC(SR)MCLRACAR = MR D L LRAC=(SR)AC=(SR)MC= MR =AR 13.
Perfect Competition
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- long-run equilibrium of the firm
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- all supernormal profits competed away
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- long-run industry supply curve
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- incompatibility of economies of scale with perfect
competition
- Does the firm benefit from operating under perfect
competition?