Key Market Structures and Economic Efficiency

Posted on Mar 6, 2025 in Economy

Productive and Allocative Efficiency

  • Productive Efficiency: Achieved when goods are produced at the lowest possible cost per unit. This occurs where Average Total Cost (ATC) is minimized (Marginal Cost (MC) = ATC).
  • Allocative Efficiency: Occurs when resources are allocated to produce the optimal mix of goods and services that consumers demand. This is achieved when the price of the last unit produced equals its marginal cost (MC = Average Revenue (AR)).

Market Structures

Perfect Competition

A market structure characterized by:

  • Many small firms.
  • Identical products.
  • No individual firm can influence market price (firms are price takers).
  • No barriers to entry or exit.
  • Perfect market knowledge.

Monopoly

A market with a single firm supplying the entire market. Monopolies often have high barriers to entry, allowing for abnormal profits in the long run.

Barriers to Entry

Obstacles preventing new firms from entering a market, such as:

  • Economies of scale.
  • Brand loyalty.
  • Legal protection.

Natural Monopoly

Exists when the market size and available technology only allow for one firm to operate profitably due to significant economies of scale.

Monopolistic Competition

A market structure with:

  • Many sellers.
  • Differentiated products.
  • No barriers to entry or exit.

Product Differentiation

A form of non-price competition where firms distinguish their products through factors like quality, design, or packaging.

Oligopoly

A market dominated by a few large firms. Key features include:

  • Interdependence between firms.
  • Price rigidity.

Concentration Ratio

Measures the proportion of total market share controlled by a specific number of firms. A high concentration ratio often indicates an oligopoly.

Cartel

A group of firms that collude to fix prices, limit competition, and maximize joint profits, acting as a collective monopoly. Cartels are typically illegal.

Non-Collusive Oligopoly

Where firms in an oligopoly do not collude. Competition is typically non-price, and firms develop strategies considering rivals’ reactions.

Price Discrimination

Occurs when a producer charges different prices to different customers for the same good or service, based on their willingness to pay. The price difference is not justified by cost differences.