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Market Structures Brief Notes
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Brief description of market structures, described as simply and concisely as possible, to rejog your memory and hep your understanding. Tips on examinations included.
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Perfect Competition:Incredible number of homogenous
(identical) firms selling identical products.
No barriers to entry / exit
Price takers (Must follow Market Price)
Demand Curve = Average Revenue =
Marginal Revenue
Demand Curve is Perfectly Elastic. Firm can
sell at any quantity at one price, but
cannot influence the price. This is because
in a perfectly competitive market with
many firms selling homogenous goods at
homogenous prices, consumers will simply go to competition for the cheaper price. They also cannot
reduce the price, as at this point the revenue would always fall below the average total cost, and the firm
would always lose money.
Firms in perfectly competitive market always seek to operate at the profit maximization point
(D=ATC=MC) to avoid making losses. In the long run, it is unlikely that a firm operates at this point
constantly, as with so many homogenous competitors, there is no way to draw more consumers to one
shop individually, therefore the quantity sold is always random.
This is a concept. You may find market structures close to this, but never will a market be perfectly
competitive.
, Monopolistic Competition in the short run:
A great many firms, although fewer than perfect competition.
Very weak or no barriers to entry / exit.
Similar goods, although not identical.
Firms have very little market power i.e., very little ability to influence prices.
Firms can make supernormal profit.
Firms engage in non-price competition.
In the short run, firms will seek to operate at MC=MR, as this is the profit maximization point.
To establish supernormal profit in the short run, firms must establish a specific price. To find this price, draw a
straight line vertically from the profit maximization point (MC=MR) until this line meets AR. At this point, draw a
straight line horizontally until this line meets the y axis. This will demonstrate the price.
Additionally, at the point at which your vertical line meets AC, draw a horizontal line toward the y axis (Marked C1)
above. The square which results from your lines will show supernormal profit. The lines you will draw are the same
as the dotted green lines in the diagram above.
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