Market Structures 1: Perfect Competition and Monopoly Introduction to Economics Part 1 of

MARK CLEARY INTRODUCTION TO ECONOMICS Photograph tutor

KEY CONCEPTS Market Structures Perfect Competition Normal and other profits Monopoly Barriers to entry

Market Structure Market Structure: the composition of the market in terms of competition amongst producers. Main Features to Consider: Concentration Barriers to Entry Product Differentiation Availability of Information

Market Structure Forms of Market Structure: Pure Monopoly OligopolyMonopolistic Comp Perfect Comp Increasingly Competitive Higher Concentration

Perfect Competition Structure: Large number of buyers and sellers No Barriers to Entry or Exit Homogeneous Product Perfect Information for consumers and producers

Perfect Competition Implications for Market: Firms are price takers No market power for any individual firm Firms have identical cost functions Perfectly Elastic Demand Curve Prices are determined by the market mechanism

Perfect Competition Qe P q1 Q D S q Pe AC MC P The MarketThe Individual Firm D, MR,AR

Perfect Competition: Normal Profit q1 q AC MC P D = AR = MR

Perfect Competition: Supernormal Profit q1 quantity AC MC Price D = AR = MR C P

£ Q £ q D1D1 S1S1 MC ATC D = AR =MR q1q1 P1P1 ATC 1 Market Firm P1P1 Q1Q1 Loss Perfect Competition: Loss

Perfect Competition Perfect Competition and Efficiency In the Short Run: Allocative Efficiency will always occur Technical efficiency will occur if firms are making normal profit; AC = MC In the Long Run: Allocative Efficiency will occur Technical Efficiency will occur as firms always make normal profit

Monopoly Structure One producer High Barriers to Entry Differentiated product with no close substitutes Imperfect Information

Types of monopoly Pure Legal

Implications for Market Firms are price makers Sole Market Power to one firm Elasticity of Demand Curve is dependent on consumer preferences Firms revenue is dependent on their cost functions and the demand of consumers

MR D/AR Monopoly Revenues Costs/Revenues Quantity

Monopoly Profit MR D ATC MC Costs/Revenues Quantity QXQX C P

Pure Monopoly if a monopoly is contestable then potential entrants limit the amount of supernormal profit which can be earned – can have degrees of contestability from perfect to zero Barriers to entry can be: Legal e.g. existence of a patents, copyrights etc. Resource based e.g. unique control over an essential input

Pure Monopoly – existing large suppliers have economies of scale that small new entrants cannot match – existing firm has a fund from previous profits with which to wage a price war – customer loyalty to existing supplier, and strong brand image – strong political power of an existing firm may make it harder for foreign entrants to gain a foothold

Pure Monopoly Pure Monopoly and Efficiency Short Run There will neither be Allocative Efficiency or Technical Efficiency, due to ‘mark – up’ on prices. Long Run Due to barriers to entry lack of efficiency will continue. However, due to supernormal profits, innovations and product enhancements are possible, which may indirectly improve efficiency

Perfect Competition Vs Monopoly Qe P q1 Q D S q Pe P S D MR PMPM

KEY CONCEPTS Market Structures Perfect Competition Normal and other profits Monopoly Barriers to entry Perfect Competition is Superior