market structures

Topics: Perfect competition, Economics, Monopoly Pages: 22 (1815 words) Published: May 20, 2014
International MSc in Business Administration

Managerial Economics
Market Structures Part 1

Carlos Almeida Andrade
2013/14

Managerial Economics: Market Structures Part 1

Market Structures
Firms may face different environments in terms of market structure: • number of firms
• relative size of those firms,
• their influence on market conditions (market power)
• different technology and costs
gy
• information
• demand conditions, etc.
These differences have an impact on the choices made by firms. According to different conditions, we will look at the following market structures:
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
Managerial Economics / Carlos Almeida Andrade

Carlos Almeida Andrade
2013/14

Managerial Economics: Market Structures Part 1

Perfect Competition
Main conditions for a perfect competitive market:

•Many buyers and sellers in the market, each one “
“small” relative to the market. Each

firm is a price taker.
•The product of each firm is homogeneous
The
homogeneous.
•Buyers and sellers have perfect information.
•There are no t
Th
transaction costs.
ti
t
•There is free entry into and exit from the market.

Example of a market close to perfect competition: agricultural market Carlos Almeida Andrade
2013/14
Managerial Economics / Carlos Almeida Andrade

Managerial Economics: Market Structures Part 1

Perfect Competition
P

Market

S

Pe

P

Firm

Df=Pe

D
Qf

In
I a competitive market, the price is d t
titi
k t th
i i determined b th i t
i d by the intersection of supply and
ti
f
l
d
demand. An individual firm does not have any control over the formation of this price. It takes the price as given. Every quantity the firm supplies can/will be sold at price Pe. If the firm charged a higher p

g
g
price, it would not sell anything. The demand curve faced by ,
y
g
y
Carlos Almeida Andrade
the firm will be perfectly elastic (horizontal). The firm just has to decide how much to 2013/14
produce.
Managerial Economics / Carlos Almeida Andrade

Managerial Economics: Market Structures Part 1

Perfect Competition
The condition for an optimal decision in this context will be given by MR=MC, or:

Max  pQ  C Q 

C Q 
0 p
 0  p  MC
Q
Q
As we have already seen, the firm’s supply curve in the short run is given by the MC curve, in the segment where p > min AVC.
P,C

MC

AC

P

S

p
AVC

Q*

Q

Managerial Economics / Carlos Almeida Andrade

Carlos Almeida Andrade
2013/14
Q

Managerial Economics: Market Structures Part 1

Perfect Competition
S0
P,C

MC

p
AC

P

S1

AC
AVC

D
Q* Q
Profit = TR - TC = p.Q – AC.Q

Q

When there are profits to be taken in the short run, new firms will enter the market to take advantage of them. The supply curve moves from S0 to S1 and the equilibrium price declines.
declines As firms are price takers, this means that profits will decline This will happen as takers
decline.
Carlos Almeida Andrade
long as there are profits (i.e. p >AC).

2013/14
Managerial Economics / Carlos Almeida Andrade

Managerial Economics: Market Structures Part 1

Perfect Competition
S0
P

S1

P,C
S2
MC

AC

p
D
Q

Q*

Q

Firms will continue to join the market as long as there are economic profits This will put a profits.
downward pressure on prices and profits will decline. When p reaches min AC and economic profits are zero, there are no further incentives for firms to join the market (if, initially, there were short run losses, firms would leave the market). So, in the long run, competitive equilibrium i d fi d b p = MC and p = min AC (

ilib i
is defined by:
d
i
(remember, i the l
b in h long Carlos Almeida Andrade
run there are no fi d
h
fixed
costs).
2013/14
Managerial Economics / Carlos Almeida Andrade

Perfect
Competition
p

Source: Microeconomics 19th Edition by...


References: Consumer Choice
Baye, M.R. and J.Prince, “Managerial Economics and Business Strategy”, Global Edition (8th)
2013, McGraw-Hill
Carlos Almeida Andrade
Chapter 8: Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
2013/14
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