MARKET STRUCTURES

So on  the recent Monday , the class has ventured to the last topic of Microeconomics which is  Market Structures. We had go trough initial subtopic in the market structure to have better acknowledgement in the particular field.

Market structure

Definition:

1.  Market is a place where the buyers and sellers meet one another to transact business .
2. Market also be defined as an arrangement that facilitates the buying and selling of a product, service, factor of production or future commitment.
3. Market structure means the number and distribution size of buyers and sellers in the market of particular goods and services.

Profit maximization in perfect competition market.

Market equilibrium is achieved when the marginal cost equal to marginal revenue. Price is determined based on the average revenue. Prices are fixed in perfect competition, so marginal revenue is still the same result at a price.

MR=MC

P=AR=MR

Imperfect competition such as monopolistic, monopoly and oligopoly achieved  market equilibrium when marginal revenue equal with marginal cost. Price are differentiated based on quantity supplied.

MR=MC

P=AR

Types of profit possibilities:

•  Supernormal profit.

             The profit earned when total revenue is greater than total cost. It also realized when               the price is greater than average total cost.

               

•  Subnormal profit

Economic losses are the losses incurred because the price is lower than the average total cost or when total revenue is less than total cost.

• Normal profit

        Normal profit or breakeven is the profit necessary for a firm to stay in business. Normal         profits is when total revenue is equal to total cost and where no profit or loss is                       incurred.

Perfect competition market.

What is perfect competition markets ?

Market in which there are a large number of buyers and sellers, buying and selling the homogenous products at certain price levels. 

Characteristics.

A)   Large number of buyers

There are many buyers in the market but they cannot control prices. Price is fixed in the market through the forces of demand and supply. No matter how much has been purchased, price is always constants. Buyers are said to be price takers.

B)    Many sellers in the market

There are many sellers in the market. Like the buyers they too cannot control price. They are also price takers. Usually the sellers are small firms. The action of one firm will affect to the others firms. Example, if the sellers offers a lower price, then he will incur a loss, and if he sells at a higher price, there will be no demand. In simplicity, he is powerless in determining price but he can set the quantity he wants to sell.

C)    The product are homogeneous

The goods are homogeneous and not differentiated. They are identical. The consumer cannot differentiate whether the goods come from producer A or B or C.  Ads is totally absent in this market.

D)   Free entry to and exit from the market.

There must be free entry to and exit from the market. If the industry is making profits, then new firms will enter the market. No restriction is imposed.

E)    Perfect knowledge

Consumers and producers have perfect knowledge about the  market situation.

F)    Mobility of factors of production.

There must be mobility of factors of production. There are no barriers to mobility. Land has its own alternative uses.

G)   No transportation cost.

There must be no transportation cost. It is assumed that all firms are situated close to one another and are very close to the market.

H)   Independence in decision making.

There will be no external forces that will influence the decision of buyers and seller. They make their own decisions. 

Short run profit in perfect competition market.

In the short term, perfect competition market has three types of profit which is:

a)    Supernormal profit in perfect competition market.

•      The profit maximization occurs when marginal cost equal to marginal revenue.
• The firm earns supernormal profit when average revenue (AR) is greater than                 average cost (AC).
•      The shaded area (EABP) is shown the profit (supernormal profit) area.
•     Calculation:

TR=AR x Q

TR=P (x) x Q (y)

TR= xy

TC=AC x Q

TC=AC (a) x Q (b)

TC= ab

b)    Normal profit in perfect competition market.

•     The profit maximization occurs when marginal cost equal marginal revenue .
•     The firm earns normal profit when average revenue (AR) is equal with average cost     (AC). Price is equal at minimum AC, firm at breakeven profit.
•      So, the firm will get the normal profit because total revenue is equal with total cost.
•     Calculation:

     TR=AR x Q

              TR=P (x) x Q (y)
TR= xy

TC=AC x Q

         TC=AC (x) x Q (y)

                                                                TC= xy

Therefore ,

Profit= TR – TC

         =xy - xy 

=0

               =breakeven
                   =Normal profit

c)    Subnormal profit in perfect competition market.

• The profit maximization occurs when marginal cost equal marginal revenue.
•  The firm earns  subnormal profit when average revenue (AR) is less than average cost (AC).
• So, the firm will get the subnormal profit because total revenue is less than total cost.
•  The shaded (EPAB)is shown the subnormal profit (losses) area.
•    Calculation:

  TR=AR x Q

                                 TR=P (x) x Q (y)

                                 TR= xy

    

                                TC=AC x Q

                                TC=AC (x) x Q (y²)

                                TC= xy²

                                

                               Therefore ,

                          Profit= TR – TC

                                   =xy – xy²

                                   = -xy

                                   =losses

                                   =subnormal profit