block 6 - market structure Flashcards
what are markets differentiated based on
- the number of firms
- availability of information
- the nature of product sold
- ease/ difficulty of entry or exit
what is a perfect competition market structure
a market structure with
1. many buyers and sellers
2. products sold are identical/ homogenous
3. perfect information
4. freedom of entry and exit
what are the implications of a perfect competition market
- each firms market share is small - it cannot influence the price of the good by changing its output = the firm is a price taker
- price is determined in the market and given to the firm - the firm will sell its output at this market price.
the firms demand curve is perfectly elastic - the perfectly competitive firm can only make normal profit in the long run
when is profit maximised in a perfectly competitive market
when marginal revenue = marginal cost
what is the short run supply curve for a perfectly competitive firm competition market
the SMC curve above the minimum SAVC
it is a summation of all the different firms’ SMS curves
what is the long run supply curve for a perfectly competitive market
the LMC above the minimum LAC
the long run apply is not a summation of the difference firms’ LMC cuz the number of firms changes in the long run
what is the adjustment from the short run to the long run of a perfectly competitive firm
- when the price is at P1, the perfectly competitive firm produces output q1 and earns economic profit
- in the long run, new firms will be attracted into the market/ industry = causing market supply to increase and the market price to fall = reducing economic profit
- entry of new firms will stop once normal profit is restored - when P = minimum AC
( the opposite happens if firms make losses in the short run - firms will leave the market, causing the market supply to fall and market price to rise until normal profit is restored)
what happens to the long run market supply when there is no change in factor price
SR: the increase in market demand causes to rise and at a higher price, existing firms will produce a bigger output and make economic profit
LR: new firms attracted into the market, increasing
1. market supply
2. demand for inputs
- increase in supply causes market price to fall but higher demand for inputs has no effect on the factor price
- both MC and AC curve will not shift
- new firms will stop entering once normal profit is restored (when price falls back to Po)
- firms are back to producing their original output but market output has increased
what is the effect of LR supply for perfectly competitive markets when there is an increase in factor price
SR: same as when no change in factor price both
LR: new firms will enter the market, causing market supply to increase and market price to fall. increase in factor demand however, raises factor prices. the increase in factor prices will shift both the MC and AC curves up
normal profit is restored when P=minimum AC
conclusion: the LR supply is positively sloped when factor prices rise with the entry of new firms will
what is the difference between productive efficiency and allocative efficiency in a perfect competition market
productive efficiency : firm uses the least cop to produce its output
- where AC is a minimum
allocative efficiency : produces where P=MC (MC=MB)
- CS + PS is maximum = no deadweight loss
- its impossible to make someone better off without making someone else worse off
what is a monopoly market structure
the only firm in the market is producing a food that has close to no substitutes
- entry to this market is blocked
- monopoly has a strong market power
- its a price maker
- can continue to make economic profit in the long run
do monopolies always imply deadweight loss?
No, monopolies could correct market externalities and monopolists who practise first degree price discrimination
usually case:
- producers produce where P> MC (allocative inefficient) = deadweight loss
exception:
- when monopolist practices 1st degree price discrimination
- produces the output where P=MC cos under 1st degree, P=MR
- produces the competitive output which is allocative efficient ( no deadweight loss )
