Lecture13 - Lecture #13 Market Structures A market...

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Lecture #13 Market Structures A market structure is thought of as the industry composition (or context) within which a firm’s economic decisions are made. We will consider four general market structures that we will find convenient to distinguish on the basis of four criteria: Market Structure # of firms Substitutability of Product Interdependence among Firms Ease of Entry Perfect Competition Very many Perfect None Free and Easy Monopoly One None None Entirely Blocked Monopolistic Competition Many Some None Free Oligopoly Few Some Significant Difficult
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Perfect Competition Assumptions of the model…the first two assumptions will imply that the demand that confronts the firm, d F , is perfectly elastic. Assumption #1 In a perfectly competitive market there are a large number of producers. Assumption #2 The product being produced is homogeneous…consumers do not see any difference between buying the good from seller A or seller B (no brand names, no product differentiation and no inherent quality differences) product differentiation, and no inherent quality differences). P X P X d F d F + - P X X ! X "! P X P X # " X = 0
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P X P X d F d F + - P X X ! X "! P X P X # " X = 0 The firm is so small relative to the market that a change in its output does not Since there is nothing special about this firm’s product, an attempt to raise price wil its output does not significantly affect the market supply conditions or the market price. attempt to raise price will induce the loss of the firm’s entire market share to their competitors. THE FIRM CANNOT AFFECT MARKET PRICE. THE FIRM IS A PRICE TAKER. Assumption #3 There is free entry and exit into and out of the industry in the long run, i.e. no barriers to entry or exit.
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Assumption #4 The only goal of the firm is profit maximization. Assumption #5 The market environment is free of government interventions such as, taxes, tariffs subsidies production rationing or quotas tariffs, subsidies, production rationing, or quotas. Assumption #6 Perfect mobility of inputs (labour skills are easily learned, capital is readily available at its fair price, there is no monopoly of raw materials, etc.) Assumption #7 There is perfect knowledge about market conditions (for producers, consumers, and owners of all factors of production). For example, nobody suffers (or pays for) a lack of knowledge about market conditions.
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Demand Facing a Perfectly Competitive Firm P P S P** P** d F ‘= P** = MR ’= AR’ d F = P* = MR = AR D P* P* P D’ Q Q Market (Industry) Individual Firm Here, the price is determined in the overall market by market supply (S) and market demand (D) conditions. The perfectly competitive firm is a price taker at any given market price (i e P*) Any change in market conditions will change any given market price (i.e. P). Any change in market conditions will change the firm’s demand (d F ).
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This note was uploaded on 03/24/2010 for the course ECON 201 taught by Professor Vandewaal during the Spring '09 term at Waterloo.

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Lecture13 - Lecture #13 Market Structures A market...

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