Economics Market Structures Part 1 Carols Alameda Andre 2013/14 Managerial Economics: Market Structures Part 1 Market Structures Firms may face different environments in terms of market structure ; . Number of firms ; relative size of those firms, ; their influence on market conditions (market power) ; different technology and costs ; information ; demand conditions, etc. These differences have an impact on the choices made by firms.
According to different conditions, we will look at the following market structures: Perfect competition ; Monopoly ; Monopolistic competition ; Oligopoly Managerial Economics / Carols Alameda Andre Perfect Competition Main conditions for a perfect competitive market: ;Many buyers and sellers in the market, each one ” “small” relative to the market. Each firm is a price taker. ;The product of each firm is homogeneous The homogeneous. ;Buyers and sellers have perfect information. ;There are no t The transaction costs. I ;There is free entry into and exit from the market. Example of a market close to perfect competition: agricultural market Carols Alameda Andre Market s Firm UDF=pee SF In I a competitive market, the price is d t I I determined b the it I d by the intersection of supply and d demand. An individual firm does not have any control over the formation of this price. It takes the price as given. Every quantity the firm supplies can/will be sold at price Pee. If the firm charged a higher p price, it would not sell anything.
The demand curve faced by , the firm will be perfectly elastic (horizontal). The firm Just has to decide how much to produce. The condition for an optimal decision in this context will be given by MR.=MAC, or: Max PC C SQ O o pop As we have already seen, the firm’s supply curve in the short run is given by the MAC curve, in the segment where p > min PVC. MAC AC p PVC Q* = -ACE so Profit = TRY-ETC When there are profits to be taken in the short run, new firms will enter the market to take advantage of them.
The supply curve moves from SO to SSL and the equilibrium price declines. Declines As firms are price takers, this means that profits will decline This will happen as takers decline. Long as there are profits (I. E. P >AC). Firms will continue to Join the market as long as there are economic profits This will UT a profits. Downward pressure on prices and profits will decline. When p reaches min AC and economic profits are zero, there are no further incentives for firms to Join the market (if, initially, there were short run losses, firms would leave the market).