4. Amrket structure 1 Flashcards
What is market structure?
refers to the characteristics of a market that may affect the trades
What are the characteristics considered of market structures
The characteristics we consider in this course are: (a) The number and size of sellers
(b) The barriers to entry
(c) The extent of product differentiation (d) The number and size of buyers
Such characteristics may affect the nature of trades in the market
For market structures what are markets?
markets are product markets: firms = sellers, individuals = buyers
What are the two rules for profit maximisation?
Marginal output rule
Shutdown rule
What is the marginal output rule?
Rule for profit max

What is the shutdown rule?
Rule for profit max

What are the assumptions of perfect competition?
A1, Buyers are price takers
A2, Sellers and Buyers have complete information
A3 Sellers are price takers
A4 Entry is free
Describe assumption A1, buyers are price takers
A(1): BUYERS ARE PRICE TAKERS Each buyer takes price as given
They believe that they can buy as much as they want at the going price without having an effect on that price
Reasonable assumption for most product markets, it may not hold in input markets
Describe assumption 2 of PC, sellers and buyers have complete information
A(2): SELLERS & BUYERS HAVE COMPLETE INFORMATION
Sellers are able to respond to incentives
Buyers have the greatest chance to receive what they want from the market
Describe assumption 3, Sellers are price takers
A(3): SELLERS ARE PRICE TAKERS
Each seller believes its output choice will not affect the market price
This has two parts to it:
(a) Sellers can sell as much as it wants, at a given price
(b) Sellers output choice will not trigger a reaction from rivals
Describe assumption 4 of pc , entry is free
A(4): ENTRY IS FREE
A potential seller can enter the market in the long run without incurring costs that an incumbent seller would not incur
Entry is a long-run decision: all factors of production must be able to change Effectively, assumption implies:
(a) sellers are in the market if they have capital, and they can increase their output by employing more labour
(b) a potential seller without any capital cannot produce using labour alone (they have to have capital first)
What do A1 AND A2 OF PC IMPLY?
there are many buyers, who are informed of all prices
What is the size and number of sellers? pc
Many and small, a change in seller’s output has little effect on price if it small relative to total
Describe the barriers to entry in pc
Low- firms must be able to enter the market freely
Describe the product sustainability in pc
Undifferentiated- Buyers consider all products to be identical (homogeneous) so they will buy the cheapest product
When is there an equilbrium in economic models?
economic agents will not change their behaviour from the equilibrium
When is there a short run equilibrium under perfect competition?
There is an equilibrium in a perfectly competitive market when:
(a) sellers produce as much as buyers want to purchase,
(b) buyers purchase as much as sellers choose to produce
What does the short run equilbirum of perfect compeition imply?
This implies that:
(1) The market price is determined by market supply & demand
(2) A seller’s output is determined by seller-specific supply & demand
Short-run equilibrium: first, find a seller’s supply curve

Short-run equilibrium: next, find the market supply curve

Short-run equilibrium: finally, add market demand curve

Why does the pc equilibrium change in the long run?
(1) all factors are variable which has an impact on the seller’s costs (2) other sellers can freely enter the market
What is the third condition of long run pc equilbrium and what does it imply
There is a third condition of equilibrium:
(a) sellers produce as much as buyers want to purchase (b) buyers purchase as much as sellers choose to produce (c) incumbent sellers will not leave the market
potential sellers will not enter the market
All of this implies that:
(1) Sellers make normal profit in the long-run (zero economic profit)
Long run equilbru=ium of pc
























