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1.11 Market Structures
1.11 Market Structures
Welcome to the
ECONOMIC ANALYSIS
Class!
P* = 20
15
q* = 1500
Price/unit MC
60
50
40
30
20
10 D
Q
1 2 3 4 5 6
MR
Industry vs Firms
A group of business or firms that produce
the same product or service
Criteria of Classifying Market Structures
-- Number of firms in the industry
--the nature of good or service produced
--Conditions of entry or exit in the industry
4 Distinct Market Structures
1. Pure Competition
2. Monopoly
3. Oligopoly
4. Monopolistic Competition
-- Large number of sellers and buyers
For an individual firm, the combined effects
No individual is large enough to affect the market.
of these characteristics has no power to
--control
Product is price
the homogeneous
and will earn zero economic
(non-differentiated)
profit
Milk in the
A or long
Milk B orrun.
Milk C, etc.
-- There is perfect information
-- Easy entry and exit
Firm Supply Market Supply
Supply
Price Price
New P*
Supply
Q Q
Individual Demand Market Demand
Price Price
P*
Q Q
If the individual cannot set the price,
? where does the price come from?
Supply
Price
Prevailing Price
P*
Demand
Quantity
?
MR = MC
q*
Firm X
P
MC
P* D = MR
Profit ATC
AVC
TR
TC
0 Q
Q*
Produce where MR meets MC.
P* = 20
15
Profit = (P*-ATC) Q*
q* = 1500 = (20*-15) (1500)
= P7,500
Solve for the firm’s profit. 5 Bonus points to first
five problem solvers.
P2* P2*=d2=MR
q*
(higher demand)
Self-adjusting Economy
20
10 D
Q
1 2 3 4 5 6
MR
To raise prices, the firm can reduce output.
Profit-maximizing rule: MR = MC
Oligopoly
Features
1. Few number of sellers
2. Product is differentiated or not
3. Difficult to enter/exit
4. Mutual interdependence
Types
1. Non-price Oligopoly
2. Price Leader
3. Cartel
Characteristics of Monopolistic Competition
CARTEL = Oligopoly 1 = Monopoly
OPEC
Price/unit MC
60
Profit = (P*-ATC) (Q*)
50
= (40-30) (3)
40
= P 30M
30 ATC
20
10 D
Q
1 2 3 4 5 6
MR
Characteristics of a Monopolistic Competition