II.  Market Structure

A.  Market Structure

• Competitive environment in which buyers and sellers operate

1.  Perfect competition

a.  Characteristics

(1) Many buyers and sellers

(2)  Homogeneous product sold

(3)  Perfect mobility of resources (free entry and exit)

(4)  Perfect knowledge of conditions

• Firms are price takers - have no control over price

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b.  Price determination

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c.  Short-run equilbrium

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d.  Long-run equilibrium

• Entry or exit eliminates profits and losses

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e.  Global competition

(1)  Impact of trade

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(2)  Foreign exchange markets

• Depreciation - domestic currency falls in value

• Appreciation - domestic currency rises in value

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2.  Monopoly

a.  Characteristics

(1)  One seller

(2)  Unique product

(3) Entry is blocked

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b.  Sources of monopoly

(1)  Control of inputs

• Raw materials, knowledge

Ex. -

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(2)  Patents and copyrights

• Have exclusive right to produce product

Ex. -

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(3)  Economies of scale

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(4) Government franchise

• Government allows only one company to provide product

Ex. -

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c.  Short-run equilibrium

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d.  Comparison with perfect competition

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3.  Monopolistic competition

a.  Characteristics

(1)  Many sellers

(2)  Differentiated product

(3)  Entry and exit is easy

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b.  Product differentiation

(1)  Real - different physical characteristics

(2) Imaginary - different brands

(3) Location

(4)  Service

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b.  Short-run equilibrium

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c.  Long-run equilibrium

• Entry or exit eliminates profits or losses

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d.  Product variation and selling expenses

• Product variation - change some characteristic of the product

• Selling expense - expense for advertising, sales force, provision of service, etc.