Market Structure and Perfect Competition

Market Structure:

Perfect Competition:

Study Paradigm of Market (Industrial Organization):

Market Structure (S) / Behaviours or Conduct (C) / Performance (P)

Perfect Competition:

Conditions or Assumptions:

a) Many buyers and sellers: fragmented industry so that each company has negligible market share that cannot change the whole structure

b) Homogeneous (or identical) product: Consumers will not acquire additional costs in collecting additional information. Ex) Gold, silver etc.

c) Perfect mobility of inputs: no entry or exit barriers

d) Perfect information

e) No transaction cost

f) Price takers- price is now a parameter
* P.C. is an ideal type of market structure with good predictability of market.

Profit maximization of a representative firm:

• Supply curve- MC curve above AVC.
• Point D- Shut-Down Point
• Point E- Beak-Even Point
• Demand curve: MR curve at P*
• Total revenue: ? P*OQ*C
• Total costs: ? AOQ*B
• Economic profit: ? P*ABC
• Any points between D and E: A firm should produce some output even though the firm is facing economic losses. Why?

1773_profit maximization.jpg

Industry Supply Curve in SR:

418_supply curve in SR.jpg

Residual Demand Elasticities:

(amount demanded from i-th firm) = (industry demand) – (amount produced by all other firms)

683_residual demand elasticities.jpg

The smaller i k is, the larger εi , which depends on supply elasticities of other firms.

In competitive market,

i) ki is relatively small.
ii) even if ki is not small but if eS is elastic, then εi is elastic.

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