1. Market Structure
In economics, market structure (also known as market form) describes the state of a market with respect to competition.
The major market forms are:
Perfect competition, in which the market consists of a very large number of firms producing a homogeneous product.
Monopolistic competition, also called competitive market, where there are a large number of independent firms which have a very small proportion of the market share.
Oligopoly, in which a market is dominated by a small number of firms which own more than 40% of the market share.
Oligopsony, a market dominated by many sellers and a few buyers.
Monopoly, where there is only one provider of a product or service.
Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm.
Monopsony, when there is only one buyer in a market.
The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions.
These somewhat abstract concerns tend to determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade. 1

2. Market Structure/Form
Seller Entry Barriers
Seller Number
Buyer Entry Barriers
Buyer Number
Perfect Competition No
Many
Monopolistic competition
Oligopoly
Yes
Few
Oligopsony
Monopoly
One
Monopsony
Bilateral Dupoly
yes

3. Continued…
The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.
The main criteria by which one can distinguish between different market structures are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.

4. Perfect Competition Firms are price-takers
Each produces only a very small portion of total market or industry output
All firms produce a homogeneous product
Entry into & exit from the market is unrestricted

5. Demand for a Competitive Price-Taker
Demand curve is horizontal at price determined by intersection of market demand & supply
Perfectly elastic
Marginal revenue equals price
Demand curve is also marginal revenue curve (D = MR)
Can sell all they want at the market price
Each additional unit of sales adds to total revenue an amount equal to price

6. Demand for a Competitive Price-Taking FirmS
Price (dollars) D
Price (dollars) P0 P0
D = MR Q0
Quantity
Quantity
Panel A – Market
Panel B – Demand curve facing a price-taker

7. Profit-Maximization in the Short Run
In the short run, managers must make two decisions:
Produce or shut down?
If shut down, produce no output and hires no variable inputs
If shut down, firm loses amount equal to TFC
If produce, what is the optimal output level?
If firm does produce, then how much?
Produce amount that maximizes economic profit
Profit =

8. Profit Margin (or Average Profit)
Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin (& average profit)
Managers should ignore profit margin (average profit) when making optimal decisions

9. Short-Run Output Decision
Firm’s manager will produce output where P = MC as long as:
TR  TVC
or, equivalently, P  AVC
If price is less than average variable cost (P  AVC), manager will shut down
Produce zero output
Lose only total fixed costs
Shutdown price is minimum AVC

10. Profit Maximization: P = $36
Total revenue =$36 x = $21,600
Total cost = $19 x = $11,400

11. Profit Maximization: P = $36
Panel A: Total revenue & total cost
Panel B: Profit curve when P = $36

12. Short-Run Loss Minimization: P = $10.50
Total cost = $17 x = $5,100
Profit = $3,150 - $5, = -$1,950
Total revenue = $10.50 x = $3,150

13. Irrelevance of Fixed Costs
Fixed costs are irrelevant in the production decision
Level of fixed cost has no effect on marginal cost or minimum average variable cost
Thus no effect on optimal level of output

14. Summary of Short-Run Output Decision
AVC tells whether to produce
Shut down if price falls below minimum AVC
SMC tells how much to produce
If P  minimum AVC, produce output at which P = SMC
ATC tells how much profit/loss if produce •

15. Short-Run Supply Curves
For an individual price-taking firm
Portion of firms’ marginal cost curve above minimum AVC
For prices below minimum AVC, quantity supplied is zero
For a competitive industry
Horizontal sum of supply curves of all individual firms
Always upward sloping

16. Derivation of Short-Run Supply Curves

17. Long-Run Profit-Maximizing Equilibrium
Profit = ($17 - $12) x 240 = $1,200

18. Long-Run Competitive Equilibrium
All firms are in profit-maximizing equilibrium (P = LMC)
Occurs because of entry/exit of firms in/out of industry
Market adjusts so P = LMC = LAC

19. Long-Run Competitive Equilibrium

20. Long-Run Industry Supply
Long-run industry supply curve can be flat (perfectly elastic) or upward sloping
Depends on whether constant cost industry or increasing cost industry
Economic profit is zero for all points on the long-run industry supply curve for both types of industries

21. Long-Run Industry Supply
Constant cost industry
As industry output expands, input prices remain constant, & minimum LAC is unchanged
P = minimum LAC, so curve is horizontal (perfectly elastic)
Increasing cost industry
As industry output expands, input prices rise, & minimum LAC rises
Long-run supply price rises & curve is upward sloping

22. Long-Run Industry Supply for a Constant Cost Industry

23. Long-Run Industry Supply for an Increasing Cost Industry
Firm’s output

24. Economic Rent
Payment to the owner of a scarce, superior resource in excess of the resource’s opportunity cost
In long-run competitive equilibrium firms that employ such resources earn only normal profit
Economic profit is zero
Potential economic profit is paid to the resource as rent

25. Economic Rent in Long-Run Competitive Equilibrium

26. Profit-Maximizing Input Usage
Profit-maximizing level of input usage produces exactly that level of output that maximizes profit

27. Profit-Maximizing Input Usage
Marginal revenue product (MRP)
MRP of an additional unit of a variable input is the additional revenue from hiring one more unit of the input
If choose to produce:
If the MRP of an additional unit of input is greater than the price of input, that unit should be hired
Employ amount of input where MRP = input price

28. Profit-Maximizing Input Usage
Average revenue product (ARP)
Average revenue per worker
Shut down in short run if ARP < MRP
When ARP < MRP, TR < TVC

29. Profit-Maximizing Labor Usage

30. Implementing the Profit-Maximizing Output Decision
Step 1: Forecast product price
Use statistical techniques
Step 2: Estimate AVC & SMC • •

31. Implementing the Profit-Maximizing Output Decision
Step 3: Check shutdown rule
If P  AVCmin, produce
If P < AVCmin, shut down
To find AVCmin, substitute Qmin into AVC equation

32. Implementing the Profit-Maximizing Output Decision
Step 4: If P  AVCmin, find output where P = SMC
Set forecasted price equal to estimated marginal cost & solve for Q*

33. Implementing the Profit-Maximizing Output Decision
Step 5: Compute profit or loss
Profit = TR - TC
If P < AVCmin, firm shuts down & profit is -TFC