The four market structures:
1. Perfectly competitive markets (Lecture 16, Tute 9)
2. Monopolistic competitive (Lecture 20, Tute 11)
3. Oligopoly (Lecture 18, Tute 10)
4. Monopoly (Lecture 17, Tute 9)
1. PERFECTLY COMPETITIVE MARKETS
Competitive market – a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
There are two characteristics of a competitive market, sometimes called a perfectly competitive market:
1. Many buyers and sellers in the market.
2. The goods offered by the various sellers are largely the same (homogenous).
These conditions mean any single buyer or seller has little impact on the market price – each is a price taker.
A common third characteristic:
3. Firms can freely enter or exit the market.
This is not necessary for firms to be price takers, but it has a big effect on the long-run outcome in competitive markets.
1. To maximise profit, firm chooses a quantity of output where MR = MC. Because marginal revenue for a competitive firm equals the market price, the firm chooses a quantity where price equals marginal cost.
2. In the short run when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if P < AVC. In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the P < ATC.
3. In a market with free entry and exit, profits are driven to zero in the long run. In this long-run equilibrium, all firms produce at the efficient scale, P = min ATC, and the number of firms adjusts to satisfy the quantity demanded at this price.
In the long run, with free entry and exit, the price in the market is equal to both a firm’s marginal cost and its average total cost. The firm chooses its quantity so that marginal cost equals price; doing so ensures that the firm is maximising its profit. In the long run, entry...