Topic no. 7: Market structure Flashcards
- Distinguish the firm and industry - Explain the meaning of market structure - Understand and identify the four market structures based on their characteristics
What is the difference between firm and industry?
Firm: An organisation that produces goods and services. All producers are called firms, no matter how big they are or what they produce.
Industry: A group of firms that sells a well-defined product or closely related set of products
What is the meaning of market structure?
Market structure is a classification system for the key characteristics of a market, including:
i) number of firms;
ii) similarity of the products; and
iii) ease of entry into and exit from the market.
These determines the market power of the firm.[ability to alter the market price of a good or service]
How are market structures distinguished?
i) the number of firms in the market
ii) type of product that is sold
iii) ease of entry into / exit from the market structure
How to distinguish the number of firms in the market?
Some market structure consist of:
i) only one firm;
ii) many firms; or
iii) a few big firms
How to distinguish the type of product that is sold?
- Product sold is homogenous → Customers are indifferent as to which firm they buy from.
- Product sold is differentiated → customers are willing to pay a different price for the product.
What are barriers to entry and what are the types of barriers?
These are obstacles that make it difficult or impossible for new firms to enter an industry.
Types of barriers:
- Legal barriers
- Natural barriers
How to distinguish the ease of entry into / exit from the market structure?
Ease of entry/exit into a particular industry depends on whether there are barriers.
What are the legal barriers?
a) Government licensing: Such license restrict entry into some industries and occupations
b) Franchise: gives the holder sole legal right to supply a good or service. [e.g. Subway sandwiches]
c) Patents: Patents are granted to investors → legally prohibit other firms from selling the patented product for a number of years (10 - 25 years).
What are the natural barriers?
a) Control over essential input needed to produce a particular good.
b) Economies of scale: Gives rise to a natural monopolist. One big firm can become so efficient (can produce at a lower average cost compared to many small firms) that it can supply the entire market.
What are the three formulas in the profits of a firm?
Total revenue: Price x Quantity (P x Q)
Total Cost: Average Total Cost x Quantity (ATC x Q)
Profits: Total Revenue - Total Cost (TR -TC)
What are the 3 types of profits that a firm can experience?
a) Economic (supernormal) profit:
* Total revenue > Total cost
Total Revenue - Total Cost > 0
b) Normal (zero economic) profit:
* Total revenue = Total cost
Total revenue - Total Cost = 0
c) Economic loss (subnormal profit):
* Total revenue < Total cost
Total revenue - Total cost < 0
What are the 4 market structures?
- Perfect competition
- Monopolistic competition
- Oligopoly
- Monopoly
Number of sellers:
- Many [Perfect competition & Monopolistic competition]
- Few [Oligopoly]
- One [Monopoly]
Type of product:
- Identical [Perfect competition]
- Differentiated [Monopolistic competition]
- Identical or Differentiated [Oligopoly]
- Unique [Monopoly]
Barriers to entry:
- Weak [Perfect competition & Monopolistic competition]
- Strong [Oligopoly & Monopoly]
What are the characteristics of Perfect Competition or Pure Competition (PC)?
a) Large number of small firms
- no ability to affect product’s price
- each firm acts independently, rather than coordinates decision collectively
b) Homogenous or identical product
[All firms produce a standardized or homogeneous product]
- Assumption rules our rivalry among firms in advertising
- Buyers are indifferent as to which seller’s product they buy
c) No barriers to entry
[Firms & resources are completely mobile to freely enter or exit a market]
- Ensures that the number of firms in PC remains large
- Firms can only earn normal profit in the long run
d) Demand curve of the PC firm
Characteristics of the PC firm make it impossible for any single PC firm to have the market power to affect the market price. PC firm is a price taker.
→ cannot raise price: if raise price, sell zero output. Many substitutes from other firms selling at a lower price, able to sell as much output as it wants. No reason to decrease either as it would reduce revenue and profit.
What is a price taker?
A seller that has no control over the price of the product it sells.
What are the characteristics of Monopoly?
a) A single firm
[e.g. Singapore Post since there is only one national postal agency dealing in physical mail, only one with access to all local mailboxes.]
b) Selling a unique product
c) Very strong barriers to entry
[Effective that only one firm exists in the industry. Further implication, monopolists can continue to make economic profit even in the long run]
d) Demand curve of a monopoly
[The monopolist’s demand curve is the market demand curve. Market demand curve is negatively slope, which means that the monopolist’s demand curve must also be negatively sloped.]
*** Monopolist have market power as it can influence the price or the quantity sold. Monopolist’s market power is derived from its size & the fact that it sells a unique product. [Price maker. The more market power, the more inelastic the monopolist’s demand curve]
