Market structures Flashcards
4 types of market structures
Monopoly
Oligopoly
Monopolistic competition
Perfect competition
Characteristics of perfect competition
Low barriers to entry/exit
Normal/zero economic profit LR
Homogenous (same) product
No price power
Short run shut down rule in competitive markets
operate when P>=AVC, otherwise shut down
Perfectly competitive SR supply curve is…
the MC curve when P>=AVC
Perfect competition has
Perfectly elastic demand curve = MR = AR = Price
Increasing cost case
less efficient use/more scarce and more expensive resources cause cost curves to rise. LR supply thus upward sloping.
Decreasing cost case
more efficient use/less scarce and less expensive resources cause cost curves to fall. LR supply thus downward sloping.
Marginal firm
Firm that would exit the market if the price were any lower
Characteristics of monopoly
price maker
sole seller of product
product does not have close substitutes, decrease in prices to increase sales
Faces a downward sloping demand curve
Monopoly caused by
high barriers to entry where a firm either owns a key resource, has exclusive production rights from govt., or has much lower production costs than many smaller firms (natural monopoly)
A natural monopoly arises when…
there are economies of scale over the relevant range of output e.g. firms with large infrastructure requirements (electrical, water, gas networks) where it’s cheaper to just build 1
2 effects of monopoly increasing sales are:
1) output effect 2) price effect
Output effect
increased output causes increased TR
Price effect
Decreased price causes increased TR
Point of profit maximisation in monopoly is ____, but the price is traced from the ______
MC = MR; demand curve
