PERFECT COMPETITION

2
MARKET STRUCTURE
Objectives
3
_ Define market structure
_ Distinguish between different market structures
_ Evaluate characteristics of perfect competition
_ Discuss the short run and long run possibilities for
perfect competition
Introduction
4
_ Recall: Profit maximised at MC=MR
_ Questions:
_ How large will the profit be?
_ Will it be at high or low output levels?
_ Is that output efficient?
_ What price is charged to consumers?
_ How will firms decisions affect consumers?

What is Market Structures?
5
_ It is categories of markets based on the degree of
competition that exists between firms in the market.
_ Market structures influences the decisions of firms
and also the benefits consumers get from businesses.
Importance of Market Structures
6
_ Causal chain:
Structure Conduct Performance
Main determinants
7
One firm Many firms
Monopoly
Oligopoly Monopolistic
Competition
Perfect
Competition
The number of firms in the market
Main determinants
8
No competition
High level of
competition
Monopoly
Oligopoly Monopolistic
Competition
Perfect
Competition
The degree of competition in the market
9
Perfect Competition
Number of firms
10
_ There are likely to be a large number of firms
operating in the market
_ The market is likely to be saturated or close to
saturation
Size of Firms
11
_ In order to accommodate a large number of firms,
each firm is likely to be small in size
_ This is true in terms of capital, output and sales
volumes
Ease of Entry (and exit)
12
_ There is little or no barriers to entry and exit
_ Firms are able to entry the market easily due to low
start up costs and no legal or competitive barriers
_ Exiting the market is likely to be easy with
production units highly liquid and low sunk costs
Nature of Products
13
_ Products are homogenous, identical,
undifferentiated
_ Each firm does not have a signature product or a
brand to be associated with
Market Power
14
_ Each firm does not have any control in the market
_ Each firm sells at the price decided through market
equilibrium
_ Each firm does not have any influence over
consumers, NO consumer loyalty
Demand Curve
15
_ Demand curve is perfectly horizontal
_ Demand curve is perfectly elastic
_ Firms are unlikely to change their volumes of
production
Assumptions
16
_ There is perfect info for producers and consumers
_ All resources are perfectly mobile
Performance
17
_ Short run:
_ Supernormal profit
_ Normal profit
_ Loss
_ Long run:
_ Normal profit