The difference between long-run and short-run

Short-run: the period in which at least one of inputs is fixed (ex. Technology, land).
Long-run: the period in which all inputs can vary
Types of costs
 Fixed costs (FC): costs that remain constant as output changes (ex. Rent)
Average fixed cost(AFC): fixed cost divided by the quantity of output (AFC = FC/Q)
 Variable costs (VC): costs that vary as output changes (ex. Labor).
Average variable cost(AVC): variable cost divided by the quantity of output (AVC = VC/Q)
 Total costs (TC): the sum of all Fixed costs and all Variable costs. (TC = FC + VC)
Average total cost(ATC): total costs divided by the quantity of output (ATC = TC/Q)
OR the sum of Average fixed cost(AFC) and Average variable cost(AVC) (ATC = AFC + AVC)
 Marginal costs (MC): the change in total costs when the quantity of output changes.
(MC = ∆TC/∆Q)
Production function: the relationship between inputs and outputs
Market Structure
- Perfect competition and pure monopoly represent benchmarks of extremes of market structure.
- Most markets are between the extremes. Imperfect competition exists when individual firms
believe they face downward-sloping demand curves. The most important forms are monopolistic
competition and oligopoly.
- So, there are four types of market structure; perfect competition, monopolistic competition,
oligopoly, and pure monopoly.

Perfect Competition Markets

Perfect competitive markets: are markets in which individual firms have no influence over the
market prices of the products they sell. These firms are described as price takers.
Characteristics:
 Lots of firms sell the same standardized product.
 The market has many buyers and sellers.
 Productive resources are mobile.
 The access to the market information is easy; buyers and sellers are well informed.
 The ability to affect price is nil. The price is determined by the market (demand and supply
approach) (P=MC).
 Free entry to, free exist from the market.

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 Pure Monopoly Market
Pure monopoly: is a market in which a single firm is the lone seller of a unique product with no close
substitutes.
Pure monopoly statues can be conferred by legislation, as when an industry is nationalized or a
temporary patent is awarded.

Characteristics:
 There is just one firm in the market.
 There is a large ability to affect price (price maker).
 There are huge entry barriers.

There are five sources of market power; a term that refers to a firm’s ability to raises the price of
a good without losing all its sales:
 Exclusive control over important inputs.
 Patents and copyrights.
 Government licenses or franchises.
 Economies of scale and natural monopolies
 Network economies

Imperfect Competition
Imperfectly competitive firm or price setter: is a firm with at least some latitude to set its own
price.

Monopolistic competition: is an industry structure in which a large number of small firms sell
products that are close, but not quite perfect, substitutes.

Characteristics:
 There are many firms in the market
 There is little ability to affect price
 There are small entry barriers.

Oligopoly: is the industry structure in which a small number of large firms supply the entire market.
These firms are either close or perfect substitutes.

Characteristics:
 There are few firms in the market.
 There is a medium ability to affect price.
 There are bigger entry barriers than in case of monopolistic competition.