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    4 - Market Structure

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    monica raju
    The document discusses different market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. It provides characteristics of each type and explains how firms make pricing and output decisions. In perfect competition, firms are price takers and will produce at the quantity where price equals marginal cost to maximize profits. The document outlines the assumptions and conditions of perfect competition, and how the marginal revenue equals marginal cost rule determines the optimal output level.

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    4 - Market Structure

    Uploaded by

    monica raju
    60 views17 pages
    The document discusses different market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. It provides characteristics of each type and explains how firms make pricing and output decisions. In perfect competition, firms are price takers and will produce at the quantity where price equals marginal cost to maximize profits. The document outlines the assumptions and conditions of perfect competition, and how the marginal revenue equals marginal cost rule determines the optimal output level.

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    The document discusses different market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. It provides characteristics of each type and explains how firms make pricing and output decisions. In perfect competition, firms are price takers and will produce at the quantity where price equals marginal cost to maximize profits. The document outlines the assumptions and conditions of perfect competition, and how the marginal revenue equals marginal cost rule determines the optimal output level.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    60 views17 pages

    4 - Market Structure

    Uploaded by

    monica raju
    The document discusses different market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. It provides characteristics of each type and explains how firms make pricing and output decisions. In perfect competition, firms are price takers and will produce at the quantity where price equals marginal cost to maximize profits. The document outlines the assumptions and conditions of perfect competition, and how the marginal revenue equals marginal cost rule determines the optimal output level.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 17

    Market Structure

    Swapan Chakraborty
    Outline

    • Competition and market types in economic analysis


    • Pricing and output decisions in perfect competition
    • Pricing and output decisions in monopoly markets
    • Implications of perfect competition and monopoly for
    managerial decisions
    Learning Objectives

    • Describe and provide examples of the four market


    structures
    • Compare the degree of price competition among the
    four market types
    • Explain why the P=MC rule leads firms to the optimal
    level of production in competitive markets
    • Explain how the MR=MC rule helps a monopoly to
    determine its optimum quantity
    • Contrast the relationship between the MR=MC rule and
    the P=MC rule
    • Describe the shut down rule
    Competition and Market Types in Economic
    Analysis
    • Perfect competition (no market power)

    – large number of relatively small buyers and sellers

    – standardized product

    – very easy market entry and exit

    – non-price competition not possible


    Competition and Market Types in Economic
    Analysis
    • Monopoly (absolute market power, subject to government
    regulation)

    – one firm, firm is the industry

    – unique product or no close substitutes

    – market entry and exit difficult or legally impossible

    – non-price competition not necessary


    Competition and Market Types in Economic
    Analysis
    • Monopolistic competition (market power based on product
    differentiation)

    – large number of small firms acting independently

    – differentiated product

    – market entry and exit relatively easy

    – non-price competition very important


    Competition and Market Types in Economic
    Analysis
    • Oligopoly (product differentiation and/or the firm’s dominance
    of the market)

    – small number of large mutually interdependent firms

    – differentiated or standardized product

    – market entry and exit difficult

    – non-price competition important


    Competition and Market Types in Economic
    Analysis
    Competition and Market Types in Economic
    Analysis
    Pricing and Output Decisions in Perfect
    Competition
    • Basic business decision: entering a market using
    the following questions

    – How much should we produce?


    – If we produce such an amount, how much profit will
    we earn?
    – If a loss rather than a profit is incurred, will it be
    worthwhile to continue in this market in the long run
    (in hopes that we will eventually earn a profit), or
    should we exit?
    Pricing and Output Decisions in Perfect
    Competition
    • Key assumptions of the perfectly competitive
    market:

    – The firm is a price taker (it must accept the market


    price)

    – The firm makes the distinction between the short


    run and the long run
    Pricing and Output Decisions in Perfect
    Competition
    • Additional key assumptions of the perfectly
    competitive market:

    – The firm’s objective is to maximize its profit (or


    minimize loss) in the short run

    – The firm includes its opportunity cost of


    operations in its total cost of production
    Pricing and Output Decisions in Perfect
    Competition
    • Perfectly elastic demand curve: consumers are willing to
    buy as much as the firm is willing to sell at the going
    market price

    – The firm receives the same marginal revenue from the


    sale of each additional unit of product; equal to the
    price of the product

    – There is no limit to the total revenue that the firm can


    gain in a perfectly competitive market
    Pricing and Output Decisions in Perfect
    Competition
    Pricing and Output Decisions in Perfect
    Competition
    • Marginal revenue/Marginal cost approach
    – Produce a level of output at which the additional
    revenue received from the last unit is equal to the
    additional cost of producing that unit (i.e.
    MR=MC)
    – Both the TR/TC and MR=MC approach lead to the
    same price/output decision
    – For the perfectly competitive firm, the MR=MC
    rule may be restated as P=MC because P=MR in
    perfectly competitive market
    Pricing and Output Decisions in Perfect
    Competition
    • Case A: economic profit

    The point where


    P=MR=MC
    is the optimal output
    (Q*)

     profit = TR – TC
    Q* =(P - AC)

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