IB Economics: Theory of the Firm - Market Structure

Perfect Competition
1. Assumptions:
  1. - Large number of firms
    1. - Homogeneous products
      1. - No barriers to entry/exit
        - Symmetrical/perfect info
        - Perfect resource mobility
    2. price-taker
2. Price competition only
3. Exists theoretically
4. Short Run
  1. Abnormal profit
  2. Normal profit
  3. Loss
5. Long Run
  1. Normal profit
6. Effeiciency
  1. AE: leads to P=MC
  2. PE: leads to MC=ATC
Monopoly
1. Assumptions
  1. - Only 1 firm
    1. - Unique product
      1. - Significant barriers to entry/exit
        e.g. legal, resources, branding, asymmetric info
    2. price-maker
2. No/weak competition
  1. contrained by demand
3. Short Run
  1. Abnormal profit
  2. Normal profit
  3. Loss
4. Long Run
  1. usually same as SR
    1. due to barriers
5. Inefficient
6. Demand: Inelastic
Monopolistic Competition
1. Assumptions
  1. - Large number of firms
    1. - No barriers to entry/exit
      1. - Product differentiation
        close substituted
    2. price-maker
      1. less than oligopoly & monopoly
2. Price competition & non-price competition
3. Short Run
  1. Loss
  2. Normal profit
  3. Abnormal profit
4. Long Run
  1. Normal prfit
5. Inefficient
6. Demand: elastic
7. Demand: perfectly elastic
Oligopoly
1. Assumptions
  1. - Small number of firms (2-12)
    1. - Both homogeneous and differentiated products
      1. Considerable barriers to entry/exit
        e.g. start-up costs
    2. some have large market share
      1. price-maker (less than monopoly)
2. Mutually independent
  1. strategic behaviour
  2. conflicting incentives
    1. collusion & competing
3. Non-price competition
4. Short Run
  1. Abnormal profit
  2. Normal profit
  3. Loss
5. Long Run
  1. Abnormal profits available if cartels succeed
6. Inefficienct
7. Kinked demand curve
  1. top: elastic
    1. bottom: inelastic

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IB Economics: Theory of the Firm - Market Structure

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