IB Economics: Theory of the Firm - Market Structure

IB Economics: Theory of the Firm - Market Structure

1. Perfect Competition

   • Assumptions:
     • - Large number of firms
       • - Homogeneous products
         • - No barriers to entry/exit
           • - Symmetrical/perfect info
             • - Perfect resource mobility
       • price-taker
   • Price competition only
   • Exists theoretically
   • Short Run
     • Abnormal profit
     • Normal profit
     • Loss
   • Long Run
     • Normal profit
   • Effeiciency
     • AE: leads to P=MC
     • PE: leads to MC=ATC

2. Monopoly

   • Assumptions
     • - Only 1 firm
       • - Unique product
         • - Significant barriers to entry/exit
           • e.g. legal, resources, branding, asymmetric info
       • price-maker
   • No/weak competition
     • contrained by demand
   • Short Run
     • Abnormal profit
     • Normal profit
     • Loss
   • Long Run
     • usually same as SR
       • due to barriers
   • Inefficient
   • Demand: Inelastic

3. Monopolistic Competition

   • Assumptions
     • - Large number of firms
       • - No barriers to entry/exit
         • - Product differentiation
           • close substituted
       • price-maker
         • less than oligopoly & monopoly
   • Price competition & non-price competition
   • Short Run
     • Loss
     • Normal profit
     • Abnormal profit
   • Long Run
     • Normal prfit
   • Inefficient
   • Demand: elastic
   • Demand: perfectly elastic

4. Oligopoly

   • Assumptions
     • - Small number of firms (2-12)
       • - Both homogeneous and differentiated products
         • Considerable barriers to entry/exit
           • e.g. start-up costs
       • some have large market share
         • price-maker (less than monopoly)
   • Mutually independent
     • strategic behaviour
     • conflicting incentives
       • collusion & competing
   • Non-price competition
   • Short Run
     • Abnormal profit
     • Normal profit
     • Loss
   • Long Run
     • Abnormal profits available if cartels succeed
   • Inefficienct
   • Kinked demand curve
     • top: elastic
       • bottom: inelastic