MARKET STRUCTURE

Definition of a Firm

▪ A firm is an institution that buys or hires factors of production and organizes

them to produce and sell goods and services.

 A firm is an independent unit of producing goods and services for sale.

Objectives of a Firm

 The main goal or objective of a firm is to maximize profit and to minimize the
cost.

Economic Profit

• Economic profit is defined as the total revenue minus the implicit and explicit
cost.
• Consider both explicit and implicit cost

Economic Profit = TR – [Explicit Cost + Implicit Cost]

Accounting Profit

Accounting profit is defined as the firm’s total revenue minus the explicit cost.

• Consider only explicit cost

Accounting Profit = TR – Explicit Cost

Total Approach

Total approach is the simplest way to determine the equilibrium of a firm.

Under Perfect Market: TR curve is straight line through origin. The firm maximum
profits at ON output because the vertical distance between TR and TC curve is
maximum.

TR, TC

TC
TR

Highest vertical
differences

Quantity
0 N

Under Imperfect Market: Total revenue (TR) curve continues to rise from left to
right at a less than proportionate rate. A rational firm will choose the output when
the vertical distance between TR and TC is at maximum, ON.

TR, TC

TC
TR

Highest vertical
differences

Quantity
O
N
Marginal Approach

A firm is said to be in equilibrium when marginal revenue is equal to marginal cost.

MARGINAL REVENUE = MARGINAL COST

Under Perfect Market: MR curve is horizontal. When MR is equal to MC,

a firm is in equilibrium

MR, MC

MC

P* MR=AR

Quantity
Q*

Under Imperfect Market: MR curve is downward sloping. Same as perfect market,

when MR is equal to MC, a firm is in equilibrium.

MR, MC

MC

P*

AR=DD

MR
Quantity
Q*
Definition of a Market

▪ An arrangement that facilitates buying and selling of a good, service, factor of

production or future commitment.

OR

 A market is a place where the buyers and sellers meet with one another and
involves transaction.

Definition of a Market Structure

 Market structure refers to the number and distribution size of buyers and
sellers in the market of a good and service.

 Market structure is an indication of the number of buyers and sellers; their

market shares; the degree of product standardization and the ease of market
entry and exit.

Types of Market Structure

PERFECT COMPETITION: There are large numbers of buyers and sellers, buying and
selling identical product without any restriction on entry and exit, and having perfect
knowledge of the market at a time.

MONOPOLY: There is a single seller and a large number of buyers; selling products
that has no close substitution and has a high entry and exit barrier.

MONOPOLISTIC COMPETITION: There are large numbers of sellers, large number of

buyers; selling differentiated products due to branding and labelling and there are
no barriers to entry and exit.

OLIGOPOLY: There are only a few firms in the industry but a large number of
buyers; products can be either identical or differentiated, and there are barriers to
entry and exit.
 Market Form Perfect Monopolistic Oligopoly Monopoly
Competition Competition
Characterictics

Number of firms Large Large Few One

number

Type of product Homogenous Differentiate Homogenous Unique: No close

or substitutes
differentiated

Conditions to entry Very easy Relatively easy Significant Blocked

obstacles

None Some Some Considerable

Control over price

Price elasticity of Infinite Large Small Very small

demand

Examples Wheat, corn Food, clothing Automobiles, Local phone

service,
cigarettes
electricity

Reference

Deviga Vengedasalam, Karunagaran Madhavan., (2007) Principles of Economics.

Kuala Lumpur: Oxford Fajar.