Market Structures
How much “market
power”
does a business
have?
Market Structure Continuum
Least Competitive
Most Competitive
<============================================
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
• The type of market structure determines the
“pricing power” of a business (ability to raise prices)
• 5 market characteristics determine type of market
What Determines the Type of Market Structure?
Restaurants
#1: Number of Firms in that market Operating
systems
Auto Companies
#2: Type of Product Sold
#3: Ease of Entry/Exit into
the Industry
#4: Amount of Information
Available
#5: Degree of Price Control
• 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?
Perfect Competition Market Structure
Perfect Competition is only a theory/model
It does not exist in the “real” world
It would be Adam Smith’s dream!
PERFECT
COMPETITION
Most competitive
Monopolistic
Competition
Oligopoly
Monopoly
Least competitive
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
$71,000
Expenses
$10,000 (seeds)
$ 7,000 (water)
$ 4,000 (fertilizer)
$50,000 (“fair wage”—
equivalent of a salary)
$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
The Self-Regulation of Perfect Competition
T-SHIRTS
S1
P1
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S1
P1
D1
FOOD
BICYCLES
-------
S1
P1
D1
------D1
Perfect Competition Equilibrium
Entire Industry
Price
Wheat
Individual Firm
S1
Wheat
Price
A small firm can sell all of their
production at the market price (price taker)
-------------
$10 --------------
Q1
E1
D1
$10
D1
Qty
Q1
Qty