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UNIT 4: MARKET STRUCTURES & FIRM BEHAVIOUR - Coggle Diagram
UNIT 4: MARKET STRUCTURES & FIRM BEHAVIOUR
Four Basic Market Models
Perfect Competition
Many firms, identical products
Price takers
Free entry and exit
Monopolistic Competition
Many firms, differentiated products
Some pricing power
Advertising and branding important
Oligopoly
Few dominant firms
High barriers to entry
Interdependent decision-making
Monopoly
One firm
No substitutes
Strong barriers to entry
Price maker
Conditions for Perfect Competition
Very large number of small, independent sellers
Standardised (identical) products
Firms are price takers (no pricing power)
Easy entry and exit
Firms act independently
Buyers are indifferent between sellers
Demand for a Purely Competitive Firm
Perfectly elastic (horizontal demand curve)
Firm accepts market price
Can sell any quantity at that price
Demand = Average Revenue (AR) = Marginal Revenue (MR)
Industry demand is not perfectly elastic, only the firm’s
TR–TC Approach (Profit Maximisation)
Total Revenue (TR) = Price × Quantity
Total Cost (TC) = Fixed Cost + Variable Cost
Profit = TR − TC
Key decisions:
Whether to produce (short run)
How much to produce
Profit or loss outcome
Profit maximisation rule:
Output where TR − TC is greatest
Break-even point:
TR = TC → normal profit
MR–MC Approach (Profit Maximisation)
Total Revenue (TR) = Price × Quantity
Total Cost (TC) = Fixed Cost + Variable Cost
Profit = TR − TC
Key decisions:
Whether to produce (short run)
How much to produce
Profit or loss outcome
Profit maximisation rule:
Output where TR − TC is greatest
Break-even point:
TR = TC → normal profit
Profit, Loss & Shutdown Decisions
Profit situation:
Price > ATC
Profit = (P − ATC) × Q
Loss but continue producing:
AVC < Price < ATC
Covers variable costs, partial fixed costs
Shutdown point:
Price < AVC
Firm produces zero output
Loss = total fixed cost
Loss minimisation:
Produce if loss is smaller than shutdown loss
MC Curve as Short-Run Supply Curve
Firm produces where MR = MC
In perfect competition: P = MR
Therefore: P = MC
Supply curve:
MC curve above AVC only
Below AVC → shutdown
Break-even point:
Where Price = ATC
Characteristics of Monopolistic Competition
Many firms
Differentiated products (quality, branding, service, location)
Some control over price
Non-price competition (advertising)
Relatively easy entry and exit
Long Run: Normal Profit (Monopolistic Competition)
Firms enter if profits exist → demand shifts left
Firms exit if losses exist → demand shifts right
Adjustment continues until:
Price = ATC
Result:
Only normal profit
Long-run equilibrium at MR = MC
Efficiency in Monopolistic Competition
Productive efficiency:
Requires P = minimum ATC
Not achieved
Allocative efficiency:
Requires P = MC
Not achieved
Reasons for inefficiency:
Price > MC
Output below optimal level
Excess capacity (underutilised resources)
Underallocation of resources
Key Graph Relationships (Perfect Competition)
Demand (D) = AR = MR → horizontal at market price
MR curve overlaps demand curve
MC curve is upward sloping
Profit maximisation at MR = MC
Profit area = (P − ATC) × Q
Break-even where TR = TC or P = ATC
Loss area when ATC > P
Shutdown where P < AVC