Number of sellersNature of the product homogenous (identical),
differentiated?Freedom of entry and exitControl over priceNon price
Competition
Types of profit :
Economic profit is Total Revenue less explicit and implicit
costs.Accounting profit is total revenue less explicit costsNormal
profit is an implicit cost which the opportunity cost for the
entrepreneur the return that he could have earned in the next best
alternative.
Features of the four market structures
Type of market
Number of firms
Freedom of entry
Nature of
product
Examples
Implications for demand curve
faced by firm
Perfect
competition
Very many
Unrestricted
Homogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic
competition
Many / several
Unrestricted
Differentiated
Builders, restaurants
Downward sloping,
but relatively elastic
Oligopoly
Few
Restricted
Undifferentiated
or differentiated
Cement
cars, electrical appliances
Downward sloping. Relatively inelastic (shape depends on
reactions of rivals)
Monopoly
One
Restricted or completely blocked
Unique
Local water company, train operators (over particular
routes)
Downward sloping: more inelastic than oligopoly. Firm has
considerable control over price
Perfect Competition:Free entry and exit to industryHomogenous
product identical - no consumer preferenceLarge number of buyers
and sellers no individual seller can influence priceSellers are
price takers have to accept the market pricePerfect information
available to buyers and sellers
Short Run EquilibriumSince the firm is a price taker, he can
sell any quantity at the given price.This implies that his marginal
revenue curve is horizontalMR = Price
Perfect CompetitionShort-run equilibrium of the firmPricegiven
by market demand and supplyOutputwhere P = MCProfit= revenue -
costpossible supernormal profits
figO(b) FirmQ (thousands)O(a) IndustryPQ (millions)QeShort-run
equilibrium of industry and firm under perfect competition
The long runlong-run equilibrium of the firmall supernormal
profits competed awayLRAC = AC = MC = MR = AR
Rs Q OLong-run equilibrium of the firm under perfect
competition
Perfect CompetitionThe long runlong-run equilibrium of the
firmall supernormal profits competed awayLRAC = AC = MC = MR =
ARlong-run industry supply curveincompatibility of economies of
scale with perfect competitionDoes the firm benefit from operating
under perfect competition?
