Market Structure
Characteristics
No barriers to entry – Firms can enter and leave the industry as and when they
chose.
A large number of buyers and sellers – Each of which controls too little market
share to be able to influence the market price.
Homogenous products – All firms sell identical products, making competitive
advertising pointless and also meaning there is no brand loyalty.
Perfectly elastic supply of Factors of Production – The cost per unit of
production remains the same.
All firms aim to maximise Profits – This happens when MC = MR
So
Basically
• Because there is freedom of entry, and all
goods are homogenous each firm is too small
to influence the market price.
• If one firm charged more than the other
firms, it would go out of business .
• If it charged less all firms would lower their
price to match it.
Therefore each firm is a Price Taker: they have no choice but to charge
the same as everyone else.
In the short run at least one factor of production is fixed
In the Long Run all of the factors of production have
changed
Due to perfect knowledge of Price levels and No barriers to
entry there are no profits earned in the long run.
The arrival of new firms causes the Industry supply curve to
shift to the right, forcing the price down.
The Consumer can buy the good for the lowest
possible price that still allows the seller to remain
in business, and therefore the consumer is not
exploited.
There is no waste of resources, such as on
persuasive and competitive advertising.
Efficiency is encouraged, since anyone who cannot
produce at the lowest point on the AC curve goes
out of business.
Goods are Homogenous, so consumers don’t get
any variety.
Firms are constantly only one step away for going
out of business. This may discourage
entrepreneurship.
Each firm has only a small market share, and so
may not benefit from economics of scale. As a
result, AC may be higher than if there were fewer
larger firms.
 2007, Section B, Question 2 (a)
 (i)
A firm operating under conditions of Perfect
Competition is a ‘price taker’ . Explain the concept of
being a ‘price taker’. (6 marks)
 (ii) Explain, with the aid of a labelled diagram, the
equilibrium position of a firm in short run perfect
competition. (19 marks)
 (i) Being a price take means that the firm has too little
market share to influence the market price, and must
charge the price that the market sets. If it charges more, it
sells nothing. If it charges less all other firms lower their
price to match it.
 (ii) In the SR,the perfectly competitive firm faces the
following:
 A U- shaped Ac curve with the MC curve cutting it
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upward at its lowest point.
Flat AR and MR CURVES, since it’s a price taker.
It maximises profit at MC = MR (circled).
The profit on each unit sold is AR – AC. When this is
multiplied by Q, it tells you the supernormal profit
earned.
In the SR, the firm makes supernormal profit.
 2007, Section B, Question 2 (b)
 With the aid of a labelled diagram(s), explain the
impact which the entry of new firms would have on the
market and on the equilibrium position of this firm (25
marks)
 Answer





In the LR, new firms enter the industry because:
 There are no barriers to entry.
 They went to take some of the supernormal profit
that was earned in the SR.
 Since there is perfect knowledge, they know about
this supernormal profit.
Their entry cause the market supply curve to shift to
the right.
This drives down the market price from P1 to P2. Since
each firm is a price taker , it must now charge P2.
The firm still maximises profits at MC = MR. Any firms
that don’t go out of the business will be forced to charge
a price that is at the lowest point on the AC curve.
Therefore, since AR = AC for each unit sold, the firm
makes only normal profit in the LR.
 http://schmidtomics.blogspot.com/2010_01_01_arc
hive.html
 www.davidmcwilliams.ie/2012/01/30/punkeconomics
 www.economist.com
By Savannah Moody