CHAPTER 35: MARKET STRUCTURE
The term market structure describes the way in which goods and services are supplied by firms
in a particular market. More specifically, it describes the characteristics of a market in terms of:
• the number of buyers and sellers in the market
• the nature of the products and whether they are different
• the ease of entry into the market
• the extent to which all firms in the market have the same information
Over the years, economists have developed models of market structures. There are four such
models.
Perfect competition is an ideal market structure where there are many firms, freedom of entry
into the industry with all firms producing identical products. Firms are price takers and there is
perfect information for all firms in the market. The other market structures below are
collectively referred to as imperfect competition.
• Monopolistic competition is where there are many firms and freedom of entry into an
industry but, unlike perfect competition, firms have some control over the product and its
price. Firms are price makers.
• Oligopoly is where there are few firms and they have market power to erect barriers to entry
to deter competition from new firms. The products can be wide ranging. Firms are price makers
as they have some control over price depending on the market power of competitors.
• Monopoly is where there is a single seller in the market. When there is just one firm
producing a good or service for the entire market, this is referred to as a pure monopoly.
, Perfect competition is a theoretical extreme. A perfectly competitive market is a hypothetical
market where competition is at its greatest possible level.
Key characteristics
Perfectly competitive markets exhibit the following characteristics:
• There is large number of buyers and sellers exist in the market.
• They have perfect knowledge of market conditions and the price that is charged.
• Firms produce homogeneous, identical, units of output that are not branded.
• There is complete freedom of entry and exit from the market.
• No single firm can influence the market price, or market conditions. The single firm is
said to be a price taker.
• There are assumed to be no externality that is no external costs or benefits to third
parties.
• Firms can only make normal profits in the long run, although they can make abnormal
(super-normal) profits in the short run.
Equilibrium in perfect competition
The term market structure describes the way in which goods and services are supplied by firms
in a particular market. More specifically, it describes the characteristics of a market in terms of:
• the number of buyers and sellers in the market
• the nature of the products and whether they are different
• the ease of entry into the market
• the extent to which all firms in the market have the same information
Over the years, economists have developed models of market structures. There are four such
models.
Perfect competition is an ideal market structure where there are many firms, freedom of entry
into the industry with all firms producing identical products. Firms are price takers and there is
perfect information for all firms in the market. The other market structures below are
collectively referred to as imperfect competition.
• Monopolistic competition is where there are many firms and freedom of entry into an
industry but, unlike perfect competition, firms have some control over the product and its
price. Firms are price makers.
• Oligopoly is where there are few firms and they have market power to erect barriers to entry
to deter competition from new firms. The products can be wide ranging. Firms are price makers
as they have some control over price depending on the market power of competitors.
• Monopoly is where there is a single seller in the market. When there is just one firm
producing a good or service for the entire market, this is referred to as a pure monopoly.
, Perfect competition is a theoretical extreme. A perfectly competitive market is a hypothetical
market where competition is at its greatest possible level.
Key characteristics
Perfectly competitive markets exhibit the following characteristics:
• There is large number of buyers and sellers exist in the market.
• They have perfect knowledge of market conditions and the price that is charged.
• Firms produce homogeneous, identical, units of output that are not branded.
• There is complete freedom of entry and exit from the market.
• No single firm can influence the market price, or market conditions. The single firm is
said to be a price taker.
• There are assumed to be no externality that is no external costs or benefits to third
parties.
• Firms can only make normal profits in the long run, although they can make abnormal
(super-normal) profits in the short run.
Equilibrium in perfect competition
