Market Structures

How much “market power”

does a business have?

<============================================ Perfect Competition

MonopolyOligopolyMonopolisticCompetition

Most Competitive Least Competitive

Market Structure Continuum

• The type of market structure determines the “pricing power” of a business (ability to raise prices)

• 5 market characteristics determine type of market

#3: Ease of Entry/Exit into the Industry

#1: Number of Firms in that market Restaurants

Auto Companies Operating systems

#2: Type of Product Sold

#5: Degree of Price Control

What Determines the Type of Market Structure?

#4: Amount of Information Available

• Price Taker: firm has little/no control over price• Price Setter: firm has some control over price

Perfect Competition

Does the Free Market really work this way?

PERFECTCOMPETITION

MonopolisticCompetition

Oligopoly Monopoly

Perfect Competition is only a theory/model It does not exist in the “real” world It would be Adam Smith’s dream!

Most competitive Least competitive

Perfect Competition Market Structure

Perfect Competition Characteristics

• Many small Firms

• Homogenous products

• Complete freedom to enter or exit industry

• Perfect information

• Price Taker: – No price control—sell at Market Price

Redwood High School Example

Concept of “Zero Economic Profit”

• In long run profits are pushed to zero economic profit– This does not mean you earn no money

Example (farmer): Revenue Expenses

$71,000

$10,000 (seeds)

$ 4,000 (fertilizer)

$50,000 (“fair wage”— equivalent of a salary)

$ 7,000 (water)

$71,000 $71,000

Perfect Competition in Action

• Markets of perfect competition are naturally “self regulating”

• Prices are pushed lower until firms reach zero economic profit

• Only most efficient businesses will survive

Worksheet

T-SHIRTS BICYCLES FOOD

The Self-Regulation of Perfect Competition

S1

D1

S1

D1

S1

D1

-------P1 P1 P1------- -------

Perfect Competition Equilibrium

Price

Qty

Wheat

D1

S1

---------------------------

$10

Q1

E1

Price

Qty

A small firm can sell all of their production at the market price (price taker)

$10

Q1

Entire Industry Individual Firm

D1

Wheat