MARKET STRUCTURE : PERFECT COMPETITION

MARKET
Dr. Tinneke Hermina., S.T., M.Si
WHAT IS MARKET
STRUCTURE?
Market structure, depicts how firms are
differentiated and categorized based on types of
goods they sell (homogeneous/heterogeneous) and
how their operations are affected by external factors
and elements. Market structure makes it easier to
understand the characteristics of diverse markets.
THE CLASSIFICATION
OF MARKET

Many firms Many firms Few firms One firm

Identical Similar but Identical or No

product not identical product similar product similar product

Monopolistic
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Perfect Competition Oligopoly Monopoly
Competition
 Problem
 Have you ever noticed that all the tomatoes of
the same type in a farmer’s market cost about
the same price? The same thing is true of
roadside vegetable stands in the countryside.
If one stall in a locality has tomatoes for $3 per
pound, they all do. Now the price may change
from week to week, but it’s always the same
across the different vendors in the market. You
will soon learn why this is

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 ILLUSTRATION
 Imagine nowadays, you had a lemonade
stand. It was one of several on the street. Your
neighbor, Julie, also had a lemonade stand and
she typically sold her lemonade for 25 cents.
You figured that in order to make more
money, you would charge 50 cents and steal
all her customers. Sadly, everyone bought
from Julie and you had no customers at all.

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 CHARACTERISTICS OF PERFECT
COMPETITION MARKET

Firms are said to be in perfect competition when

the following conditions occur:
Click icon to add picture  the industry has many firms and many
customers;
 all firms produce identical products;
 sellers and buyers have all relevant
information to make rational decisions about
the product being bought and sold; and
 firms can enter and leave the market without
any restrictions—in other words, there is free
entry and exit into and out of the market.

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 CHARACTERISTICS OF PERFECT
COMPETITION MARKET

 A perfectly competitive firm is called a PRICE TAKER,

because the pressure of competing firms forces them to
Click icon to add picture accept the prevailing equilibrium price in the market.
 The market price is DETERMINED SOLELY BY SUPPLY AND
DEMAND IN THE ENTIRE MARKET and not the individual
farmer. If a firm in a perfectly competitive market raises the
price of its product by so much as a penny, it will lose all of
its sales to competitors, since NO RATIONAL CONSUMER
WOULD PAY A HIGHER PRICE for an identical product

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HOW DOES PERFECT COMPETITION
MARKET MAXIMIZE THE PROFIT?
Since a perfectly competitive firm must accept the price for its
output as determined by the product’s market demand and
supply, it cannot choose the price it charges. Rather, the
perfectly competitive firm can choose TO SELL ANY QUANTITY Click icon to add picture
OF OUTPUT AT EXACTLY THE SAME PRICE. This implies that
the firm faces a PERFECTLY ELASTIC DEMAND CURVE for its
product: buyers are willing to buy any number of units of
output from the firm at the market price. When the perfectly
competitive firm chooses what quantity to produce, then this
quantity—along with the prices prevailing in the market for
output and inputs—will determine the firm’s total revenue,
total costs, and ultimately, level of profits.

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 Total Revenue, Total Cost, and Profit at the
Raspberry FarM
ILLUSTRATION Quantity (Q) Total Revenue (TR) Total Cost (TC)
0
10
0
40
62
90
Profit
-62
-50
As an example of how a perfectly competitive firm decides 20
30
80
120
110
126
-30
-6
what quantity to produce, consider the case of a small farmer 40 160 138 22
50 200 150 50
who produces raspberries and sells them frozen for $4 per 60 240 165 75
pack. Sales of one pack of raspberries will bring in $4, two 70 280 190 90
80 320 230 90
packs will be $8, three packs will be $12, and so on. If, for 90 360 296 64
example, the price of frozen raspberries doubles to $8 per 100
110
400
440
400
550
0
-110
pack, then sales of one pack of raspberries will be $8, two 120 480 715 -235
packs will be $16, three packs will be $24, and so on.

Based on its total revenue and total cost curves, a Total Revenue, Total Cost, and Profit at the
Raspberry Farm
perfectly competitive firm like the raspberry farm can
800
calculate the quantity of output that will provide the
600
highest level of profit.
400

200
The firm’s profit-maximizing level of output will occur
0
where MR = MC (or at a level close to that point). 0 10 20 30 40 50 60 70 80 90 100 110 120
-200

9 -400

Total Revenue (TR) Total Cost (TC) Profit

 Thank you!
Dr. Tinneke Hermina., S.T., M.Si
Email:
tinneke.hermina@uniga.ac.id