1. Market structures 1.Perfect Competition 2. Monopoly 3. Oligopoly 4. Monopolistic Competition

2.

Determinants of market structure

• Number of sellers

• Nature of the product homogenous (identical), differentiated?

• Freedom of entry and exit

• Control over price

• Non price Competition

3.

Types of profit:

Economic profitis Total Revenue less explicit and implicit costs.

Accounting profitis total revenue less explicit costs

Normal profitis an implicit cost which the opportunity cost for the entrepreneur the return that he could have earned in the next best alternative.

4. Features of the four market structures 5.

Perfect Competition:

• Free entry and exit to industry

• Homogenous product identical - no consumer preference

• Large number of buyers and sellers no individual seller can influence price

• Sellers are price takers have to accept the market price

• Perfect information available to buyers and sellers

6. Short Run Equilibrium

Since the firm is a price taker, he can sell any quantity at the given price.

This implies that his marginal revenue curve is horizontal

MR = Price

7. Perfect Competition

Short-run equilibrium of the firm

• Price

• • given by market demand and supply

• Output

• • whereP = MC

• Profit= revenue - cost

• • possible supernormal profits

8. Short-run equilibrium of industry and firm under perfect competition fig O (b)Firm Q(thousands) O (a)Industry P Q(millions) Q e S D P e MC AR D = AR = MR AC AC 9. Short-run shut-down point fig O O (a)Industry P Rs Q(millions) S (b)Firm MC AC Q(thousands) D 2 P 2 AR 2 D 2= AR 2 = MR 2 AVC 10. Long-run equilibrium under perfect competition fig O O P Q(millions) Q L Q(thousands) New firms enter Supernormal profits Profits return to normal (a)Industry (b)Firm S 1 D LRAC P L P 1 S e AR 1 D 1 AR L D L 11. Perfect Competition

The long run

• long-run equilibrium of the firm

• • all supernormal profits competed away

• • LRAC = AC = MC = MR = AR

12. Long-run equilibrium of the firm under perfect competition RsQO (SR)AC(SR)MCLRACAR = MR D L LRAC=(SR)AC=(SR)MC= MR =AR 13. Perfect Competition

The long run

• long-run equilibrium of the firm

• • all supernormal profits competed away

• • LRAC = AC = MC = MR = AR

• long-run industry supply curve

• incompatibility of economies of scale with perfect competition

Does the firm benefit from operating under perfect competition?