Unit 2

MARKET STRUCTURES – MARKET AND CONCENTRATED

Different Kinds of Market Structures

• We will examine four market structures:

• Competitive• Perfect Competition• Monopolistic Competition

• Concentrated• Oligopoly• Monopoly

Perfect Competition• Perfect competition is the most competitive market structure

possible.  It is characterized by the following:

          a)  there are many small firms,

            b)  it is easy for new firms to enter and,

            c)  all firms sell identical products.

All Firms selling the exact, identical product??

• - very rare scenario where the product is identical

• - producers are forced to sell at the same price as the other producers or all of them will lose money

Fruit and Vegetables are the same

Perfectly Competitive Market• Joe can sell as many

strawberries as he can produce at the price of $1. 

• If he tries to raise his price, his sales will drop to zero as the consumers have many competitors to buy from.

• This is a perfectly elastic demand curve.

Producers in a Perfectly Competitive Market• For producers in a perfectly competitive market, they must:

• Reduce production costs per unit as much as possible (i.e., maximize production efficiency),

• Maximize production as much as is economical,

• Sell at the price the market determines (a price taker).

• The level of competition will mean that the profit level will be low and many firms will go bankrupt or be struggling to survive. 

Keeping costs down• To survive in a perfectly competitive market a firm must

maximize efficiency and minimize production costs per unit produced. 

• To understand how producers have to keep prices low, you have to learn a little bit of ACCOUNTING AAAAAAAHHHHHH!!!!!

FIXED Costs• Fixed costs refer to costs that a firm must pay regardless of how

many products are produced.• If a firm owns a factory then they will pay property taxes and

heating costs for the building irrespective of the amount of goods and services that are being produced.

• The fewer products that are produced the greater the average fixed cost per unit will be.

Example – Average Fixed Costs• A firm pays $1000 property

tax on a factory. 

• If their factory produces only one  product then the average fixed property tax cost per unit produced is $1000, or very high.

• If the factory produces 100 units, then the average fixed property tax cost per unit produced is $10, or much lower.  This relationship can be displayed graphically.

Variable Costs• Variable costs are those costs (e.g., labour and raw materials)

which increase as production output increases.

Labour costs depend on the salary of the individual workers and their level of output. 

• Any factory, or other production facility, will have a certain optimum production capability.

• Optimum production will be achieved with a specific number of workers.

• If there are fewer workers, they will be overworked and therefore prone to errors and reduced productivity. If there are too many workers, they will be underutilized and therefore inefficient.

Law of Diminishing Returns• This graph reflects the following data

that demonstrates that as workers are added to a production, facility production per worker increases to an optimum number of workers, in this case six. 

• Once the optimum level is reached, adding additional workers leads to a decline in average output per worker as each worker adds fewer and fewer additional products. 

• This phenomenon is called the law of diminishing returns.

• For example, if additional units of one productive input are combined with a fixed quantity of another productive input, the average output per unit will increase at first and then decline.

Look at the numbers….

Number of Workers Total Production Output

Average Output per Worker

1 2 2

2 14 7

3 36 12

4 64 16

5 95 19

6 120 20

7 133 19

8 144 18

9 153 17

10 160 16

Marginal productivity• The fact that each additional worker is adding fewer products to

the overall output is an important statistic. • Marginal productivity is the number of additional products

produced for one new worker added. 

Productivity diminishes…Number of Workers

Total Production

Output

Average Output per

Worker

Marginal Productivity per Worker

1 2 2 2

2 14 7 12

3 36 12 22

4 64 16 28

5 95 19 31

6 120 20 25

7 133 19 13

8 144 18 11

9 153 17 9

10 160 16 7

So what's the big deal?• Marginal productivity will be important for producers because

hiring additional workers is expensive and beyond a certain point the production gained by hiring another worker is not worth the expense.