MARKET STRUCTURE
Market Structure is the number of firms producing identical products which
are homogeneous.
In economics, market is a place where buyers and sellers are exchanging
goods and services with the following considerations such as:
1.
2.
3.
Types of services being traded.
The number and size of buyers and sellers in the market.
The degree to which information can flow freely.
TYPES OF MARKET STRUCTURES
1.
Perfect or Pure market
Perfect or Pure Market is a market situation which consists of a
very large number of buyers and sellers offering a homogenous
product.
A perfect market is defined by several conditions, collectively
1.
2.
called perfect competition.
Perfect Competition is built on two critical assumptions:
The behavior of an individual firm.
The nature of industry on which it operates.
Perfect competition cannot be found in the real world. For such to exist,
the following conditions must be observed and required:
1.
A large number of sellers, each acting independently and not
2.
colliding with each other.
Selling a homogenous product, that is, the output of one firm
is indistinguishable from the output of any other firm in the
3.
industry.
No artificial restrictions placed upon price or quantity. Any
artificial restrictions placed upon the movement of prices
and/or the quantity of the output prevents a pure competition
market situation.
4.
Easy entry and exit. Sellers are free to enter and leave a
purely competitive industry. A firm must be able to sell its
5.
product as easily as a long-established firm can.
All buyers and sellers have perfect knowledge of market
6.
conditions and of any changes that occur in the market.
Firms are price takers.
SHORT-RUN ANALYSIS OF PERFECT COMPETITION
Marginal revenue (MR) is the increase in total revenue resulting from a oneunit increase in output. Since the price is constant in the perfect competition.
The increase in total revenue from producing 1 extra unit will equal to the
price. Therefore, P= MR in perfect competition.
If EP< - FC firm should shut down. Then its lost will be the Fixed cost.
EP = - FC. In order for EP < - FC, market price, P, must be lower than the
minimum AVC.
If EP>- FC, firm should produce. That is when market price is greater than
minimum AVC.
Marginal revenue and marginal cost (MC) are compared to decide the profitmaximizing output.
If MR > MC, then the firm should continue to produce.
If MR = MC, then the firm should stop producing the additional unit. As the
additional units MC would be higher according to law of diminishing returns,
MR would be less than MC; that is, the firm would loss profit by producing
additional units. Therefore, this is the profit maximizing output level.
If MR < MC, then the firm should lower its output.
Long-RUN ANALYSIS OF PERFECT COMPETITION
In the long run, a perfectly competitive firm adjusts plant size, or the
quantity of capital, to maximize long-run profit. In addition, the entry and
exit of firms into and out of a perfectly competitive market guarantees that
each perfectly competitive firm earns nothing more or less than a normal
profit. As a perfectly competitive industry reacts to changes in demand, it
traces out positive, negative, or horizontal long-run supply curve due to
increasing, decreasing, or constant cost.
The combination of firm and industry adjustment results in a multivariable
equilibrium condition in which the price (which is also average and marginal
revenue) is equal to marginal cost and average cost (both short run and long
run). This long-run equilibrium illustrated in the exhibit above is achieved at
the minimum efficient scale', 500,400)">minimum efficient scale of the longrun average cost curve.
P = AR = MR = MC = LRMC = ATC = LRAC
With price, marginal revenue, and average revenue (P = MR = AR) equal to
marginal cost (MC and LRMC), each firm maximizes profit and has no reason
to adjust its quantity of output or plant size. With price and average revenue
(P = AR) equal to average cost (ATC and LRAC), each firm in the industry is
earning only a normal profit. Economic profit is zero and there are is
economic loss.
3.
IMPERFECT MARKET
A market where information is not quickly disclosed to all
participants in it and where the matching of buyers and sellers
isn't immediate. Generally speaking, it is any market that does not
adhere rigidly to perfect information flow and provide instantly
available buyers and sellers.
Forms of Imperfect market
1.
Monopoly
A monopoly exists when a specific person or enterprise is the only
supplier of a particular commodity (this contrasts with
a monopsony which relates to a single entity's control of
a market to purchase a good or service, and with oligopoly which
consists of a few entities dominating an industry).
