Tag: and Their Efficiency Properties

(Unit 1 – Microeconomics)

1. Introduction

The concept of market structure refers to the nature and degree of competition prevailing in a particular market or industry. It is defined by characteristics such as number of firms, nature of the product, entry and exit conditions, market power, and price control.

Market structures influence how firms behave, determine equilibrium prices and outputs, and affect economic efficiency and welfare.

2. Classification of Market Structures

Each market structure leads to a different price-output determination and distinct efficiency outcomes.

3. Perfect Competition

Characteristics

1. Large number of buyers and sellers

2. Homogeneous product

3. Perfect knowledge

4. Free entry and exit

5. Perfect mobility of factors

6. Firms are price takers

Short-Run Equilibrium

A firm is in equilibrium when:

$$MC=MR$$

and the MC curve cuts the MR curve from below.

Depending on cost and price levels, the firm may earn supernormal profits, normal profits, or losses.

Long-Run Equilibrium

In the long run, entry and exit of firms drive all firms to earn normal profits.

$$P=MC=MR=AR=AC$$

This represents productive and allocative efficiency.

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Efficiency under Perfect Competition

Thus, perfect competition is socially optimal.

4. Monopoly

Features

1. Single seller and no close substitutes

2. Barriers to entry

3. Price maker

4. Firm = Industry

Equilibrium

$$MC=MR$$

but price (P) > MC, since the monopolist faces a downward-sloping demand curve.

Welfare Implications

Monopoly leads to:

• Higher price and lower output than perfect competition.

• Deadweight loss (DWL) due to misallocation of resources.

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Efficiency under Monopoly

5. Monopolistic Competition

Features

1. Many sellers, product differentiation

2. Freedom of entry and exit

3. Some control over price

4. Heavy non-price competition (advertising, branding)

Equilibrium

Each firm faces a downward-sloping demand curve (AR).
In equilibrium:

$$MC=MR$$

but

$$P>MC$$

In the long run, new entrants eliminate supernormal profits → only normal profits remain.

Efficiency

• Allocative Inefficiency: $P>MC$

• Productive Inefficiency: Firms don’t produce at minimum AC

• Excess Capacity: Output is below optimum scale

However, variety and consumer choice increase welfare partially.

6. Oligopoly

Features

1. Few large firms dominate

2. Mutual interdependence

3. Product differentiation (or homogeneity)

4. Entry barriers

5. Strategic behaviour (Game theory relevance)

Models of Oligopoly

Efficiency

• Allocative Efficiency: Not achieved; $P>MC$

• Productive Efficiency: Not achieved; high AC due to inefficiency

• Dynamic Efficiency: Often high (innovation driven by rivalry)

7. Comparative Equilibrium Analysis

8. Efficiency Properties and Welfare Implications

A. Allocative Efficiency

• Achieved when $P=MC$ → society values goods as much as they cost to produce.

• Only perfect competition satisfies this condition.

B. Productive Efficiency

• Achieved when firms produce at minimum AC.

• Only perfect competition attains this in the long run.

C. Dynamic Efficiency

• Relates to technological innovation and R&D investment.

• Often higher in monopolistic and oligopolistic markets due to profit incentives.

D. X-Inefficiency

• Monopoly and oligopoly may exhibit inefficiency due to slack management.

E. Welfare and Deadweight Loss

Deadweight loss under monopoly or oligopoly arises because:

$$P>MC\Rightarrow Q_m<Q_c$$

— representing lost consumer and producer surplus.

9. Competitive vs. Non-Competitive Equilibria

10. Efficiency and Market Failure

Market Failure Causes

• Monopoly power (restrictive output, higher prices)

• Externalities

• Public goods

• Asymmetric information

When markets fail to achieve Pareto optimality, government intervention (regulation, taxation, antitrust) may restore efficiency.

11. Policy Implications

1. Promote Competition: Encourage entry and discourage collusion.

2. Antitrust Laws: Prevent monopoly abuse.

3. Regulation: Control prices in natural monopolies (utilities).

4. Subsidies for R&D: Enhance dynamic efficiency.

5. Public Provision: Where private markets fail (education, healthcare).

12. Summary

13. Visual Summary (for Diagrams)

1. Perfect Competition: $P=MC=MR$, lowest price, highest output.

2. Monopoly: $P>MC$, restricted output, deadweight loss.

3. Monopolistic Competition: $P>MC$, excess capacity.

4. Oligopoly: Price rigidity, interdependent demand curves.

14. UGC NET Focus Areas

15. Key Takeaway

Perfect competition is the benchmark for maximum efficiency.
All non-competitive structures—monopoly, monopolistic competition, and oligopoly—deviate from Pareto optimality, leading to welfare loss.
However, dynamic gains in innovation may sometimes justify moderate market power.