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Buyers and

sellers

Number
Types of
and size
goods
and
Market of buyers
and
services
sellers

Transparency
of information
Market
Structure

Perfect Imperfect

Oligopoly Monopolistic Monopsony Oligopsony


Monopoly Competition

Natural Legal Coercive Pure Differentiated


Market Structure
Market structure – identifies how Importance: Models – a word of warning!
a market
is made up in terms of:
• The number of firms in the • Degree of competition • Market structure deals with a
industry number of economic
affects the consumer – will it
• The nature of the product ‘models’
benefit • These models are a
produced the consumer or not? representation of reality to
• The degree of monopoly help us to understand what
power each firm has • Impacts on the performance
may be happening in real
• The degree to which the and behaviour of the life
firm can influence price company/companies • There are extremes to the
• Profit levels involved model that are unlikely
• Firms’ behaviour – pricing to occur in reality
strategies, non-price • They still have value as they
enable us to draw
competition, output levels comparisons and contrasts
• The extent of barriers to with what is observed
entry in reality
• The impact on efficiency • Models help therefore in
analysing and evaluating –
they offer a benchmark
Perfect Market

 One extreme of the market structure spectrum


 Characteristics:
 Large number of firms
 Products are homogenous (identical) – consumer
has no reason to express a preference for any firm
 Freedom of entry and exit into and out
of the industry
 Firms are price takers – have no control
over the price they charge for their product
 Each producer supplies a very small proportion
of total industry output
 Consumers and producers have perfect knowledge about the
market
Short-Run Analysis of Perfect Competition
At this output the firm
MC is making normal profit.
This is a long run
equilibrium position.
AC Given the assumption of profit
maximisation, the firm produces
at an output where MC = MR
The average
(Q1). This output level is acost curve is the
fraction of thestandard ‘U’ – shaped curve.
total industry
supply. MC cuts the AC curve at its
lowest point because of the
P = MR = AR mathematical relationship
The MC is the cost of
between marginal and average
producing additional The industry price is
values.
(marginal) units of determined
output. It by the demand
falls at first (due to and supply
the law of of the industry
diminishing returns)asthen a whole.
rises The firm is a
as output rises. very small supplier within
the industry and has no
control over price. They will
Q1 Output/Sales
sell each extra unit for the
same price. Price therefore
= MR and AR
Long Run Analysis of Perfect Competition
Because the model assumes
perfect knowledge, the firm
gains the advantage for only a
short time before others copy
MC the idea or are attracted to the
MC1 industry by the existence of
abnormal profit. If new firms
enter the industry, supply will
AC increase, price
The lower AC will
andfall
MC and the
would
firm willthat
imply be left
themaking normal
firm is now
AC1 profit once again.
earning abnormal profit
(AR>AC) represented by the
Average
grey area.and Marginal costs
could be expected to be lower
P = MR = AR but price, in the short run,
Abnormal profit remains the same.
AC1 P1 = MR1 = AR1 Average and Marginal costs
could be expected to be lower
but price, in the short run,
remains the same.

Q1 Q2 Output/Sales
Imperfect Market
Characteristics:
Large number of firms in the industry
May have some element of control over price due to
the fact that they are able to differentiate their
product in some way from their rivals – products are
therefore close, but not perfect, substitutes
Entry and exit from the industry is relatively easy – few
barriers to entry and exit
Consumer and producer knowledge imperfect
Monopoly Characte
-ristics:
New firms
are
difficult
to enter

One Owns
producer patent or
or seller copyright

No
Operations available
substitute
are under
for the
economies product
of scale they
produced

Has Controls
the
control
supply of
over the raw
price materials
Classifications of monopoly:
Natural Monopoly Legal monopoly Coercive Monopoly
 single firm can  “de jure”  existence as a sole
supply the entire  government grants producer or
market due to the to the private distributor is by
fundamental cost individual or firm means of coercion
of the structure over the product or (legal or illegal)
 Capital cost is large the service  Violates price
enough compared principle of free
to variable cost market to avoid
 Have cost competition
advantage over
competitors
Short –run Analysis of Monopoly
Welfare
implications of
monopolies
MC
The price in a competitive
market would be £3 with
AC outputAlevels at Q1.at the diagram for
look back
Loss of consumer perfect competition will reveal
surplus that in equilibrium, price will be
equal to the MC of production.
We can look therefore at a
comparison of the differences
between price and output in a
competitive
The higher price andsituation
lower compared
to a monopoly.
output means that consumer
surplus is reduced, indicated by
the grey
The shaded
monopoly area.
price would be
£7 per unit with output levels
lower at Q2.
AR
MR On the face of it, consumers
face higher prices and less
Q2 Q1 choice in monopoly conditions
compared to more competitive
environments.
Welfare
implications of
monopolies
The monopolist will be
affected by a loss of producer
£7 surplus shown by the grey
triangle but……..
MC The monopolist will benefit
from additional producer
surplus equal to the grey
£3
AC shaded rectangle.

Gain in producer
surplus

Output / Sales

AR
MR
Q2 Q1
Long- run Analysis of Monopoly
Welfare
Costs / Revenue implications of
monopolies
MC
£7 The value of the grey shaded
AC triangle represents the total
welfare loss to society –
sometimes referred to as
the ‘deadweight welfare loss’.

£3

AR
MR
Output / Sales
Q2 Q1
Oligopoly

 Small number of firms


 Sells differentiated or identical products
 Has control over price
 Extreme difficulty in entering the market
 Decision of one firm influenced the others
Oligopoly Types Types of
(according to organization
the product
they sell):

Pure Oligopoly Fewer sellers Cartel Formal agreement to set


that produced up a monopoly price,
identical allocate output, and
products share profit among
themselves
Examples:
Differentiated Few sellers Collusion Informal agreement to
Oligopoly where value, adopt policies that will
characteristics restrict or reduced the
or qualities of level of competition in
goods vary the market
Examples:
Kinked Demand Curve
Large
number
of buyers
and
sellers
Similar
with Product
Perfect Differentia
Competi tion
tion
Monopolistic
Competition

Product Limited
Variation control
and over the
Promotion price

New
firms can
enter
easily
Monopolistic or Imperfect Competition
This is a short run equilibrium
MC position for a firm in a
monopolistic market
Cost/Revenue
structure.
This is a short run equilibrium
position for a firm in a
AC monopolistic market
structure.
£1.00
We assume that the firm
produces where MR = MC
Abnormal Profit (profit maximising output).
At this output level, AR>AC
and the firmthe
Since makesadditional
£0.60
abnormal profit (the grey
revenue received from
shaded area).
each unit sold falls, the
MR curve lies under the
The demand curve facing
AR curve.
the firm will be downward
sloping and represents
Marginalthe
Cost and

MR D (AR) AR earned from sales. Cost will be the


Average
same shape. However,
because the products
Q1
Output / Sales are differentiated in
some way, the firm will
only be able to sell extra
output by lowering
price.
Monopolistic or Imperfect Competition
MC
Cost/Revenue Because there is relative
freedom of entry and exit
into the market, new
firms will enter
AC encouraged by the
existence of abnormal
profits. New entrants will
increase supply causing
price to fall. As price falls,
the AR and MR curves
shift inwards as revenue
from each sale is now
less.

AR1 D (AR)
MR1 MR
Q1 Output / Sales
Monopolistic or Imperfect Competition
MC
Cost/Revenue Because there is relative
freedom of entry and exit
into the market, new
firms will enter
AC encouraged by the
existence of abnormal
profits. New entrants will
increase supply causing
price to fall. As price falls,
the AR and MR curves
shift inwards as revenue
from each sale is now
less.

MR1 AR1 D (AR)


MR
Q1 Output / Sales
Small Number
of Large Single Buyer
Buyers:

Oligopsony Monopsony

Barriers to Few Barriers to No


Entry Alternatives Entry Alternatives

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