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
Summary notes for perfect competition
Monopoloy
When there is one large seller of a particluar good, legal monopoly = over 25% share of marekt
At its extreme, there is no competition whatsoever in a monopolised market
HWat is a pure monoply
100% share of the market
What are the assumptions for monopolies?
A1- buyers are price taakers
A2- Buyers and sellers have complete information
A3, the monopolist is a price maker
A4 entry is blocked
Describe assumption A3 for a monoply
A(3): THE MONOPOLIST IS A PRICE MAKER
A price maker can influence the price which it sells its output.
This has two parts to it:
(a) A seller sells more when its price is lower: its demand curve slopes downwards
(b) the seller’s output choice does not trigger a reaction from competitors (if there are any)
Describe assumption A4
A(4): ENTRY IS ‘BLOCKED’
A potential seller cannot enter the market. Not even in the long-run.
Barriers can be legal, structural or strategic
What do A1 and A2 imply about the market structure of a monoply?
There are many buyers, who are informed of all prices
Describe the size and numbers of sellers for the market structure of a monopoly
One, large A firm must be large enough to affect price: it is a price maker
Rivals (if any) must be small, otherwise they would respond strategically to the seller’s output choice
Describe the barriers to entry of the market structure of a monoply
high, firms must be unable to enter the market
Describe the product subsitiutiability with regards to the market structure of a monoply
Differntiated-
When the seller is the only one, its product is unique.
That is, it is differentiated so much so that it has no close rivals
What is the equilibrium of a monopoly determined by?
The equilibrium is again determined by the two rules for profit maximisation: (1) the marginal output rule and (2) the shut down rule.
How does the marginal output rule help determine the quuilbrium of a monoply
A pure monopolist’s demand curve is the market’s demand curve So, its demand curve slopes downwards
This is also the average revenue (AR) curve: D = AR = P (price)
How does this affect the marginal revenue curve? To sell another unit, the price has to fall
This has two effects on total revenue (TR):
- The good thing: another unit is sold at price P, so TR increases
- The bad thing: all other units are sold at a slightly lower price, so TR decreases
These two effects imply the marginal revenue curves lies below the demand curve
Diagram to show total revenue and marginal revenue of a monoply
What does producing an extra unit of output in a monopoly do?
- increases the amount of units sold but
- it lowers the price for which all units are sold
Diagram to show revenue curves and elasticity of demand of a monoply
What does it mean if MR is positive in a monoply?
What does it mean if MR is negative in a monoply?
Diagram to show equilbrium under a monoply
Why is a monoply worse than perfect competition?
A monopolist produces less and prices higher than a perfectly competitive market
What is total welfare?
Sum of consumer and producer surplus
What is consumer surplus?
CONSUMER SURPLUS: the sum of the difference between the amount consumers are willing to pay for the good and what they actually pay