Market Structures & Perfect Competition
Economic Development (Module 3)
MARKET STRUCTURE ● considered as price takers because they do not
● are the individual characteristics of each have control over the price they charge for their
particular industry in economy product
● they also show the organization and
composition of firms to the market e. Easy Entry and Exit
● IMPORTANCE: understanding market ● it is easy to be in the business and also easy to
structure helps in strategic decision-making leave because there are many people engaged
and regulatory policies in the same business
f. Price = Demand
TYPES OF MARKET STRUCTURE ● sellers set the price based on what the market
would dictate
1. Perfect Competition ● All firms are assumed to produce the exact
● has the greatest number of competitors same product
● EXAMPLE: agricultural products ● each firm has to take the market price for its
goods
UNDERLYING ASSUMPTIONS UNDER PC
2. Monopolistic Competition
a. Large Number of Participants ● characterized by a fairly large number of firms
● The market consists of many buyers and in the market
sellers, ensuring no single entity controls the ● EXAMPLE: retail
market.
3. Oligopoly
b. Homogeneous Products ● is a market structure dominated by a small
● All firms offer identical products, making them number of large firms that control most of the
perfect substitutes for consumers. market share
● EXAMPLE: tech firms
c. Perfect Information
● Buyers and sellers have full knowledge of 4. Monopoly
prices and product quality in the market. ● a firm that is the sole seller of a product without
close substitutes
d. Free Entry and Exit ● has lesser competitors
● Firms can freely enter or leave the market ● EXAMPLE: utilities
without restrictions or costs.
CHARACTERISTICS OF MARKET STRUCTURES
e. Price Takers
1. Number Of Sellers And Buyers
● No single firm can influence the market price;
● Markets differ by the number of buyers and
all accept the prevailing price.
sellers influencing competition levels.
CHARACTERISTICS OF PERFECT COMPETITION
2. Product Homogeneity vs Differentiation
a. Number of firms in the Industry ● Products can be identical or differ, affecting
● has sellers/players; a single seller’s decision consumer choice and firm strategy.
has no impact on the market price.
3. Ease of Entry and Exit
b. Nature of the Product Produced ● The ability to enter or leave a market impacts
● Products under perfect competition are usually competition and market dynamics
identical or homogenous.
4. Price-Setting Power of Firms
c. Non-price competition or advertisement ● Firms vary in their ability to control prices
● There is no need for an advertisement because depending on market structure.
everyone knows their products
d. Degree to which the firm can influence price
● have no influence to pricing
AUTHOR/S: (REYES, A.M): BSA-1A
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Market Structures & Perfect Competition
Economic Development (Module 3)
ROLE OF MARKET STRUCTURES THREE CASES IN THE SHORT RUN
IN ECONOMY 1. SUPERNORMAL / ABNORMAL PROFITS
1. Pricing and Output Impact ● In this situation more firms enter, and start this
● Market structures determine firms' pricing business to share profit
strategies and the quantity of goods produced.
2. Consumer Choice and Welfare
● Different market types affect consumer options
and overall well-being in the market.
3. Resource Allocation Effects
● Structures guide how resources are distributed
across the economy for optimal use.
4. Economic Efficiency and Innovation
● Market structure influences how efficiently
resources are used and innovation is
encouraged.
INTERPRETATION
MARKET EQUILIBRIUM BASICS Firm’s Equilibrium
1. Supply and Demand Interaction (applies to economic loss)
● Supply and demand curves intersect to ● attained at green point [MC=MR]
determine market price and quantity. ● The MC is the green curve and the violet line is
the MR, MC cuts MR from below
2. Price Determination
● The equilibrium price is set where quantity Average cost to produce goods
demanded equals quantity supplied. (applies economic loss)
● is at Black Point
3. Marginal Cost and Revenue ● [C is cost price, Q is output]
● Equilibrium occurs when marginal cost equals
marginal revenue for firms. Supernormal Profit area
● is in green(rectangle)
4. Market Adjustment Process ● [P is selling price, C is Average Cost]
● Prices adjust to restore equilibrium when
supply and demand are unbalanced. 2. ECONOMIC LOSS
● In this situation firms will exit
EQUILIBRIUM OF A FIRM IN SHORT RUN
● Short Run is characterised by the market
condition in which new firms cannot be
established
● Firms cannot expand their output
● No new techniques will be developed
● during short run, firm has to confront with
two types of cost:
Fixed Cost
● It is not possible for the firms to recover the FC
in the short run
● firms output decision are not influenced by the
fixed cost INTERPRETATION
Variable Cost Economic Loss area
● Firm must recover variable cost in the short run ● is in brick color (CP) because cost is more than
● If a firm fails to recover the average variable selling price
cost in the short run, firm will decide not to
produce and shut down the business to
minimise losses
AUTHOR/S: (REYES, A.M): BSA-1A
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Market Structures & Perfect Competition
Economic Development (Module 3)
3. NORMAL PROFITS ALLOCATIVE EFFICIENCY
● firms neither enter nor exit ● requires that resources be apportioned among
firms and industries to yield the mix of products
and services that is most wanted by society
● least-cost production at each level of output
assumed
● occurs when resources are distributed to
maximize consumer satisfaction
ALLOCATIVE EFFICIENCY EXPLANATION
Price equals Marginal Cost
● Perfect competition ensures price matches
marginal cost, achieving optimal resource
allocation
INTERPRETATION
Firm’s Equilibrium
Benefits to Consumers and Society
● attained at price (P) [MC=MR=AR]
● This efficiency leads to lower prices and
maximizes total welfare for society
Cost to Produce [AC=AR=P]
● is equal to AC=P and AVC is below AC
Comparison with Other Markets
(AVC<AC)
● Unlike imperfect markets, perfect competition
prevents deadweight loss and inefficiency
OUTCOMES OF PERFECT COMPETITION
Long Run Equilibrium PRODUCTIVE EFFICIENCY
● Firms can only make normal profits as the
● requires that goods be produced in the least
market price falls to the minimum point of the
cost way
firm’s average cost.
PRODUCTIVE EFFICIENCY EXPLANATION
Minimum Average Cost Production
● Firms produce goods at the lowest possible
average cost to maximize efficiency
Resource Use Optimization
● Resources are allocated optimally to avoid
Profits made in the short run waste and ensure efficient production
● attracts new firms to join the market increasing
supply, cutting market price Long-Run Equilibrium Effects
● This continues until all firms are selling at the ● In the long run, firms adjust output to maintain
lower price P1 (the lowest point of their AC minimum costs and market balance.
curves) making only normal profits into the long
run Impact on Profitability
● No more firms want to join as they'd make a ● Efficient production limits profits to normal
loss (market price would fall below min AC) levels due to competitive pressure.
1. Allocatively efficient (P1 = MC at q1)
2. Productively efficient (g1 occurs at AC min) EFFICIENCY IMPLICATIONS FOR WELFARE
3. There is no X-inefficiency 1. Consumer Surplus Maximization
● firms would make losses and leave the market ● Perfect competition maximizes consumer
if their Long Run Average Cost wasn't surplus by lowering prices and increasing
minimised) choices
4. Dynamically inefficient
● no profits to pay for Research and
Development and innovation
AUTHOR/S: (REYES, A.M): BSA-1A
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Market Structures & Perfect Competition
Economic Development (Module 3)
2. Welfare Gains and Economic Optimality OVERCOMING BARRIERS
● Competitive markets achieve optimal IN COMPETITIVE MARKETS
allocation, leading to maximum social welfare Step 1: Strategies to Reduce Barriers
gains. ● Implement methods that lower entry costs and
simplify market access for new firms.
3. Role of Competitive Markets in Policy
● Competitive markets guide public policy to Step 2: Policy Measures to Enhance Contestability
enhance efficiency and promote fair outcomes. ● Introduce regulations that promote fair
competition and remove unfair restrictions.
4. Efficiency Trade-offs
● Trade-offs exist between efficiency and equity, Step 3: Role of Deregulation and Innovation
requiring balanced policy decisions. ● Encourage less government control and foster
technological advancements to boost
BARRIERS TO ENTRY competition.
TYPES OF BARRIERS
1. Legal barriers Step 4: Impact on Market Outcomes
2. Technological barriers ● Improve efficiency, lower prices, and increase
3. Financial barriers consumer choice through competitive
4. Strategic barriers dynamics.
COMMON BARRIERS EXAMPLES POLICY CHALLENGES
● Patents, high startup costs, exclusive AND MARKET REFORMS
contracts, and economies of scale Entry Barriers and Competition
● Focus on reducing entry barriers to foster
IMPACT ON COMPETITION competitive market environments.
● Barriers reduce competition, shaping market
structure and limiting new entrants
Market Infrastructure and Legal Frameworks
EFFECT ON FIRMS AND INNOVATIONS ● Improve infrastructure and establish strong
● Barriers hinder new firms and slow down legal systems for market efficiency.
innovation within the industry
Entrepreneurship and Innovation
BARRIERS TO EXIT ● Support initiatives that encourage
AND MARKET FLEXIBILITY entrepreneurship and drive innovation growth.
Exit Costs
● High costs discourage firms from leaving, Monitoring and Regulation
causing prolonged market presence. ● Implement effective monitoring to ensure fair
and transparent market practices.
Market Efficiency Role
● Barriers can reduce efficiency by limiting The information in this handout is adapted from
optimal resource reallocation. the recommended references and textbooks.
Please review those materials as well and
do not rely only on this handout.
Firm Behavior Impact Good luck and ACE your exams, JPIAns!
● Exit barriers influence companies to stay
despite losses, affecting strategies.
Trapping Inefficient Firms
● Inefficient firms remain trapped, preventing
industry renewal and growth
AUTHOR/S: (REYES, A.M): BSA-1A
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