Welcome back to my blog! In my last blog, we discussed about the different cost curve and the relationship between each other. In today’ s blog, I will introduce the different market structures.

Economics are mainly focused on the characteristics of a market, which include how many firms compete to supply it, the degree of competition between them, the extent of their product differentiation, and the ease with which new firms can enter the market to compete with them.

The first one I want to discuss is the perfect competition market. This is an ideal market structure that has many buyers and sellers, identical products, and has no barriers to entry.

The perfect competition market has five features:

• A large number of buyers and sellers
• Price taker: no influence on market price
• Identical products
• Completely free to enter and exit
• Perfect information

It is possible to analysis this market structure diagrammatically. The left picture shows the market’s situation, and the picture on the right shows each firm’s situation. The market demand curve for a normal good is downward sloping and the market supply curve is upward sloping. In the situation of perfect competition, each firm is a price taker setting their price at the market price P1. Each firms’ demand curve is perfectly elastic which means they can sell as much as they want at the given market price. It’s impossible for any firm to lower its price below P1 to try to sell more, since each firm can sell as much as they want at price P1.

Initially the market price is P1. Each firm has an individual demand curve D1 which also represents their AR(average revenue) curve and MR(marginal revenue) curve. Each firm tries to maximize profits. This occurs where MC = MR (If you forget about this point, please check my previous blogs to recall your memory!). At P1, MC = MR occurs at point A, output is Q1. If demand curve shifts to the right, price will rise to P2, MC = MR occurs at point B, output is Q2.The marginal cost tells the firm its supply for any given price. Hence, the marginal cost curve is the firm’s supply curve.

Now add firm’s short-run AC and AVC curves.

At P1, AR > AC, the firm is making super normal profit.

At P2, AR = AC, each firm is making normal profit (breaking even).

At P3, AR < AC, each firm is making a loss. But, AR > AVC. This means firms can still pay wages, raw materials etc. What the costs can’t cover are some fixed cost, but firm can keep operating.

Below point S(shutdown point), the firm has to shut down even in the short run. For example, at P4, AR < AVC. The firm cannot even cover its variable cost, then they are in real trouble! They must shut down.

That’s all for today’s blog! For the next blog, I will begin with the illustrate the long run and short run situation for the perfect competition market.