PMIC – Economics Ch 10
Ch 10 – Overview And Perfect Competition
10.1 Market Structure: an overview
Behaviour of a firm depends on the features of the market in which it sells its products
and on its production costs.
The major organisational features of a market are called the structure of the market
or market structure. Features of market structure:
- Number and relative sizes of sellers and buyers
- Degree of product differentiation
- Availability of information
- The barriers to entry and exit
At one extreme is perfect competition, followed by monopolistic competition, oligopoly
and pure monopoly. All markets fit in somewhere between the two extremes.
Feature Perfect Monopolistic Oligopoly Monopoly
Competition competition
Number of So many that So many so So few that One
firms no firm can that each firm each firm must
influence the thinks others consider the
market price will not detect others’ actions
its actions and reactions
Nature of Homogenous / Heterogenous / Homo or hetero Unique product
product standardised differentiated with no close
substitutes
Entry Completely Free Varies from Completely
free free to blocked
restricted
Information complete incomplete incompletes Complete
Collusion impossible impossible possible Irrelevant
Firms control None Some Considerable Considerable,
over the price but limited by
of the product market
demand and
the goal of
profit
maximisation
Demand curve Horizontal – Downward Downward Equals market
for the firm’s perfectly sloping sloping, may demand curve:
product elastic be kinked downward
sloping
Long-run zero zero May be positive May be positive
economic profit
1
, PMIC – Economics Ch 10
10.2 Perfect Competition
Market consists of all the buyers and sellers of the good or service concerned.
Competition occurs on each side of the market, in the goods market the buyers compete
to obtain the good and the sellers compete to sell the good to the buyers.
None of market participants (buyers and sellers) can influence the price of the
product.
All participants are price takers, and can only decide on what quantities to supply
or demand at that price.
Price is determined by the interaction of demand and supply.
Requirements
- Large number of buyers and sellers of the product. Number must be so large that
no individual buyer or seller can affect the market price
- No collusion between sellers – they must all act independently
- All goods sold in the market must be identical / homogenous. There should be no
reason for buyers to prefer the product of one seller to the product of another
seller
- Buyers and sellers must be completely free to enter or leave the market –
complete freedom of entry or exit
- All buyers and sellers must have perfect knowledge of market conditions
- No gov intervention influencing buyers or sellers
- All factors of production must be perfectly mobile – labour, capital etc must be
able to move freely from one market to another
No market meets all the requirements for perfect competition.
2
Ch 10 – Overview And Perfect Competition
10.1 Market Structure: an overview
Behaviour of a firm depends on the features of the market in which it sells its products
and on its production costs.
The major organisational features of a market are called the structure of the market
or market structure. Features of market structure:
- Number and relative sizes of sellers and buyers
- Degree of product differentiation
- Availability of information
- The barriers to entry and exit
At one extreme is perfect competition, followed by monopolistic competition, oligopoly
and pure monopoly. All markets fit in somewhere between the two extremes.
Feature Perfect Monopolistic Oligopoly Monopoly
Competition competition
Number of So many that So many so So few that One
firms no firm can that each firm each firm must
influence the thinks others consider the
market price will not detect others’ actions
its actions and reactions
Nature of Homogenous / Heterogenous / Homo or hetero Unique product
product standardised differentiated with no close
substitutes
Entry Completely Free Varies from Completely
free free to blocked
restricted
Information complete incomplete incompletes Complete
Collusion impossible impossible possible Irrelevant
Firms control None Some Considerable Considerable,
over the price but limited by
of the product market
demand and
the goal of
profit
maximisation
Demand curve Horizontal – Downward Downward Equals market
for the firm’s perfectly sloping sloping, may demand curve:
product elastic be kinked downward
sloping
Long-run zero zero May be positive May be positive
economic profit
1
, PMIC – Economics Ch 10
10.2 Perfect Competition
Market consists of all the buyers and sellers of the good or service concerned.
Competition occurs on each side of the market, in the goods market the buyers compete
to obtain the good and the sellers compete to sell the good to the buyers.
None of market participants (buyers and sellers) can influence the price of the
product.
All participants are price takers, and can only decide on what quantities to supply
or demand at that price.
Price is determined by the interaction of demand and supply.
Requirements
- Large number of buyers and sellers of the product. Number must be so large that
no individual buyer or seller can affect the market price
- No collusion between sellers – they must all act independently
- All goods sold in the market must be identical / homogenous. There should be no
reason for buyers to prefer the product of one seller to the product of another
seller
- Buyers and sellers must be completely free to enter or leave the market –
complete freedom of entry or exit
- All buyers and sellers must have perfect knowledge of market conditions
- No gov intervention influencing buyers or sellers
- All factors of production must be perfectly mobile – labour, capital etc must be
able to move freely from one market to another
No market meets all the requirements for perfect competition.
2
