CHAPTER 6: MARKET STRUCTURES I MARKET * Definition Where all activities in economy are price-led I MARKET MARKET STRUCTURE PERFECT COMPETITION IMPERFECT COMPETITION MONOPOLISTIC COMPETITION MONOPOLY OLIGOPOLY II PERFECT COMPETITION Definition - A type of market where there are unlimited suppliers and their products are identical - Examples: Agricultural products II PERFECT COMPETITION Characteristics - Suppliers are price-taker - No entry barrier - No market power - Symmetric information - No non-price competition (no advertisement) - Not necessary to choose supplier II PERFECT COMPETITION Demand and marginal revenue curves - Demand curve: parallel with horizontal axis - Marginal curve: coinciding with demand curve P P =MR = AR P* → MR = P = AR Q II PERFECT COMPETITION Maximizing profit MAX: MR=MC P In perfect competition: MR = P  MC MAX in perfect competition: P=MC P=MR P* MC < P : Increase output MC > P : Decrease output MC = P : Optimal level of output Q* Q II PERFECT COMPETITION  Break-even, shut down point  = TR – TC = Q (P - ATC)  P> ATCmin →  > → profit  P= ATCmin →  = → break-even point  P< ATCmin →  < → loss   AVCmin< P < ATCmin → continue producing P < AVCmin → shut down III MONOPOLY Definition - A type of market where there is only one supplier and the product is unique - Examples: EVN, railways Reasons of monopoly - Economy of scales - Stipulated by government - Owning patterns, license… - Monopoly in inputs - Monopoly in location III MONOPOLY ◄ III MONOPOLY Demand and marginal revenue curves - Demand curve: downward sloping and relatively steep - Marginal revenue curve: downward sloping, is twice as steep as the slope of the demand curve (and the same intercept) - P = -aQ + b MR = -2aQ + b P MR D Q III MONOPOLY Maximizing profit MAX: MR=MC P max: MR=MC P*m MC ATC MAX MR Q*m D Q III MONOPOLY P max: MR=MC P*m>>P*c Q*mP*c Q*m No supply curve in monopoly III MONOPOLY Market power - Found in 1934 by Abba Lerner P  MC L P ( ≤ L ≤ 1) - - In perfect competition: P = MC => L = The higher value of L is, the stronger market power a firm can gain Monopolist produces at the elastic section of the demand curve PERFECT COMPETITION VS MONOPOLY Competition Many buyers and sellers Monopoly Sole seller Identical products Single product without close substitutes Horizontal demand curve Downward sloping demand curve Price takers Price maker Free entry/exit High barrier to entry MC = P MC < P Zero profit in the long run Can earn positive profit 32 ... Supply curve of a monopolist No 1:1 relationship between price and quantity => No functional relationship between price and quantity => No supply curve in monopoly III MONOPOLY Market power -...I MARKET * Definition Where all activities in economy are price-led I MARKET MARKET STRUCTURE PERFECT COMPETITION IMPERFECT COMPETITION