Chapter 9 - Chapter 9 Market structure the way in which the firms in a market relate to each other and to their buyers The 4 market structures are

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Chapter 9 Market structure - the way in which the firms in a market relate to each other and to their buyers. The 4 market structures are: perfect competition or pure competition, monopoly, monopolistic competition and oligopoly. In perfect competition or pure competition the market has many firms and each firm is small relative to the market. They produce a standardized product or homogeneous product (for example: wheat). Individual firms are unable to control the prices of the goods they sell. They are characterized by free entry into the industry: if profits are high, new firms will enter the industry. It increases market supply of product and will drive price down. They are also characterized by free exit from the industry: if firms have negative economic profits, some of them will go out of business. This decreases market supply and drives prices up. Monopoly - there is only one firm in the industry If a monopoly is to be maintained over time, there must be some very significant barriers to entry , which keep new firms from entering the industry Monopolistic competition - characterized by differentiated product if there are noticeable differences in quality, or location, or service, among the goods produced by various firms in the market. There are many firms, each firm is relatively small, it’s easy to enter the industry or exit from it, their ability to control price depends on product differentiation , and there are no barriers to entry. Examples: retailing, gas stations, ice cream stores. Oligopoly - when a market has only a few firms. They have significant barriers to entry (high costs of setting up and being able to compete efficiently). This means it’s difficult (but not impossible) for new firms to enter the industry. The firms are much aware of each other. Firms are interdependent. When oligopolistic firms cooperate with each other, they are engaging in collusion . The firms may be able to maintain higher prices and higher profits engaging in collusion. Collusion is illegal in the United States.
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This note was uploaded on 12/04/2011 for the course EC 201 taught by Professor Haider during the Fall '10 term at Michigan State University.

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Chapter 9 - Chapter 9 Market structure the way in which the firms in a market relate to each other and to their buyers The 4 market structures are

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