Market Structures 
                             
       We are going to consider different types of market structure.  A market structure is 
       the market environment within which firms operate.  A summary of these is shown 
       below: 
        
        
                                             
        
        
       Perfect Competition 
        
       This is a form of market structure that produces allocative and productive efficiency 
       in long-run equilibrium.  If all markets operated in a perfectly competitive way, the 
       best allocation of resources would be ensured for society as a whole.  Perfect 
       competition is the yardstick that we can use to compare other forms of structure. 
        
       The assumptions of perfect competition are: 
         ● Firms aim to profit maximise 
         ● There are many buyers and sellers.   
         ● The product is homogeneous.   
         ● There are no barriers to entry or exit to or from the market.   
         ● There is perfect knowledge of market conditions.   
        
       Perfect Competition in the short run 
       As a firm in perfect competition is a price taker, it will face a perfectly elastic demand 
       curve.  If they price above P1, they will sell nothing because consumers have perfect 
        
       knowledge.  As they can sell as much as they like at P1, there is no incentive to reduce 
       the price. 
        
       To maximise profits, the firm will set output where MR=MC. 
                                           
        
       The SMC cost curve represents the short-run supply curve for the firm, as it shows 
       the output that the firm would supply at any given price.   
        
       Industry equilibrium in the short run 
       In the industry as a whole, there is a downward-sloping demand curve, and this is 
       formed of the preferences of consumers in the market.  If you add up all of the supply 
       curves for each firm, the result is the industry supply curve.  The price is P1 and the 
       firms in the industry willl suppy Q1 output. 
        
        
        
        
                                    
        
       The figure below shows ​the firm​ in short-run equilibrium.    To profit maximise, the 
       firm produces output q1, and accepts the market price of p1.  As the AR is greater than 
       AC1, the firm is making supernormal profits of the shaded area.  As there are no 
       barriers to entry, other firms will enter the market. 
        
                                
        
       This will shift the ​industry​ supply curve to the right, and the market price will fall. 
       The firms will no longer mark supernormal profits.  Some of them would choose to exit 
       the market, and the industry supply curve would shift to the left.  The price would 
       stabilise so that the typical firm is only making supernormal profits.   
        
        
       Perfect Competition in long-run equilibrium 
       The diagram below shows the situation for a firm ​and​ for the industry as a whole once 
       long-run equilibrium has been reached and firms no longer have any incentive to enter 
       or exit the market.  The market is in equilibrium, and the typical firm makes normal 
       profits. 
        
                                     
        
       In the diagram below, the intial market price is at p*.  The typical firm is producing q*, 
       and the industry is producing Q*.  Demand was initially at D0, but it has shifted to D1 
       as the product has become more popular.  This makes the price rise, and the typical 
       firm then moves along its short-run supply curve.  The combined supply of the firm then 
       increases to Q1.