Market Structure Flashcards
What is a market ?
A market is any arrangement that brings buyers and sellers into contact with one another for the purpose of bargaining while exchanges take place
The essential components of a market are the existence of consumers, sellers, commodities and price for the purpose of exchange
Economic theory
Economic theory examines the behavior of firms in different market situations
Types of market
Perfect competition
This is a market situation where a large number of buyers and sellers compete to produce a standard good. This is the purest form of competition
Conditions of perfect competition
- A large number of buyers and sellers
- homogeneous product
- free entry and exit
- perfect knowledge of market conditions
- uniform technology and price
- perfect mobility of factors
- absence of transportation and selling cost
Difference between pure and perfect competition
Pure completion is said to exist only when there are large number of buyers and sellers, the product is homogeneous and there is free entry and exit while perfect competition is based on more restrictive conditions, which further assumes all other features of imperfections so to convert pure to perfect we have to add ;perfect mobility of factors of production and transportation cost does not exist
What is profit ?
What is total revenue?
What is AR?
What is MR?
-Profit is the difference between total revenue received on sales of a given output and total cost of production.
-TR at any level of output is price quantity
The price of a commodity under perfect competition is uniform which makes TR increase with output
-AR Is PQ/Q which is P
-MR is the revenue derived from the sale of an additional unit of output
Short run equilibrium of the perfect competitive firm
Total cost and total revenue approach
The firm is in equilibrium when it maximizes it’s profit where profit =TR-TC and given that the normal rate of profit is included in the cost items of the firms in perfect competition the profit maximizing firm would be in equilibrium when it produces the output that maximizes the difference between total revenue and total cost
Short run equilibrium of the perfect competitive firm
Marginal revenue and marginal cost approach
MR=MC
Advantages of perfect competition
- Efficient allocation of resources
- quick response to changes in demand
- elimination of inefficient firms
- non-exploitation of the consumer
Disadvantages of perfect competition
- Existence of diseconomies of scale
- there are a lot of wastes as firms do duplicate their product
- there may be lack of innovation as firms might not be willing to spend much on research and development
Monopoly
Monopoly is the term used for the market situation where there is only one supplier. Since there is only one supplier it faces the market demand curve
Features of monopoly
- There is only one firm in the industry
- there is only one seller in the market
- the firm sells heterogeneous goods
- entry into the industry is not free but exit is free
- a price maker
- profit is Maximized when MR=MC
- the firm has a downward sloping demand curve
- determines price or output not both
Advantages of monopoly
- long term planning
- economies of scale
- research
- stable market
Disadvantages of monopoly
- Output is restricted
- the consumer may feel exploited
- lack of competition makes monopolist less efficient and complacent
- the efforts of the monopolist will be concentrated on keeping out new entrants
The basis of monopoly power
- technological superiority
- patents
- economies of scale
- statutory monopoly
- natural monopoly