- Market structures are the characteristics of the market in which a firm or industry operates
- These characteristics typically include:
- The number of buyers
- The number & size of firms
- The type of product in the market (homogenous or differentiated)
- The types of barriers to entry and exit
- The degree of competition
- Market structures can be separated into perfect competition and imperfect competition
- Imperfect competition includes the following market structures:
- Monopolistic
- Oligopoly
- Monopoly
Diagram: Efficiency and Inefficiency in Perfect and Imperfect Competition
A perfectly competitive market at the top that experiences allocative & productive efficiency. An imperfect market on the bottom in which inefficiencies exist at the profit maximisation level of output
Perfectly competitive market diagram observations
- The firm produces at the profit maximisation level of output where MC=MR (Y)
- The firm is productively efficient as MC=AC at this level of output
- The firm is allocatively efficient as AR (P)=MC
- The firm is unlikely to experience dynamic efficiency as it is unlikely to have supernormal profits to reinvest
Imperfectly competitive market diagram observations
- The firm produces at the profit maximisation level of output where MC=MR (A)
- The firm is not productively efficient as AC > MC at this level of output (B-A)
- Productive efficiency would occur at point E where MC=AC
- The firm is not allocatively efficient, as AR (P) > MC at this level of output (D-A)
- Demand is not equal to supply
- Allocative efficiency would occur where AR=MC
- The firm is likely to experience dynamic efficiency as it will be able to reinvest its profits so as to increase innovation