Structures Market Structures Perfect Competition.
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Market Structures Structures Perfect Perfect Competition Competition
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Transcript of Structures Market Structures Perfect Competition.
Market Structures Structures
Perfect CompetitionPerfect Competition
Alternative Market Structures
Classifying markets by degree of competition number of firms freedom of entry to industry nature of product nature of demand curve
The four market structures perfect competition monopoly monopolistic competition oligopoly
Features of the four market Features of the four market structuresstructures
Perfect Competition Assumptions
large number of firms firms are price takers freedom of entry and exit identical products perfect knowledge
Distinction between short and long run
Short-run equilibrium of the firm P = MC possible supernormal profits
O
(a) Industry
P
Q (millions)
S
D
Pe
MC
ARD = AR
= MR
Qe
AC
AC
Short-run equilibrium of industry and firm
Firm is a price taker. Price is given by the
market.
Qe
P1
D1 = AR1
= MR1
AR1
O O
(a) Industry
P
Q (millions)
S
D
(b) Firm
MC AC
AC
Q (thousands)
Loss is minimised
where MC = MR.
Loss minimising under perfect competition
Short-run shut-down point
O O
(a) (a) Industry Industry
P
P2
Q (millions)
S
D2
(b) (b) Firm Firm
AR2
D2 = AR2
= MR2
MC AC
AVC
Q (thousands)
O O
(a) Industry
P
P1
Q (millions)
S
D1
(b) Firm
D1 = MR1
MC
P2
D2 = MR2
D2
P3
D3 = MR3
D3
Q (thousands)
a
b
c
= S
Deriving the short-run supply Deriving the short-run supply curvecurve
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away
Perfect Competition
O O
(a) Industry
P
Q (millions)
S1
D
(b) Firm
LRAC
PL
P1
QL
Se
AR1 D1
ARL DL
Q (thousands)
Long-run equilibrium under perfect competition
New firms enterSupernormal profits
Profits returnto normal MC
Q O
(SR)AC (SR)MC
LRAC
AR = MR
DL
LRAC = (SR)AC = (SR)MC = MR = AR
Long-run equilibrium of the firm
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away
long-run industry supply curve
Perfect Competition
P
Q O
Various long-run industry supply curves under perfect competition
Long-run S
S1
D1
S2
D2
a
b
c
(a) Constant industry costs
Long-run S
P
Q O
S1
D1
S2
D2
a
Various long-run industry supply curves under perfect competition
b
c
(b) Increasing industry costs: external diseconomies of scale
Long-run S
P
Q O
S1
D1
S2
D2
a
Various long-run industry supply curves under perfect competition
b
c
(c) Decreasing industry costs: external economies of scale
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away
long-run industry supply curve
Incompatibility of economies of scale with perfect competition
Perfect Competition
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away
long-run industry supply curve
Incompatibility of economies of scale with perfect competition
Does the firm benefit from operating under perfect competition?
Perfect Competition
Thank you……………
