Microeconomics Notes Introduction to Firms, Industries, and Market Structures | Minnesota State University Moorhead

University:
Minnesota State University Moorhead
Course:
ECON-202 | Principles of Economics I: Micro
Academic year:

2020
Views:

419

Pages:

2
Author:

Malcolm Li

Microeconomics Notes - Market Power Introduction to firms, industries, and market structures: Market Power and Market Failure: Firm (business): An organization that employs factors of production to produce and sell a good or service. Industry: A group of one or more firms producing identical or similar goods or services. Industries are analyzed by using models called market structures, which describe characteristics of a market organization that determine the behavior of firms. Market Power: The extent to which each firm in the industry can control the price at which it sells its product. This is a fundamental distinction made between different market structures. There are two extreme market structures based on market power: 1. The extreme of perfect competition: Firms cannot control the price of their products; such firms have zero market power. 2. The extreme of monopoly is when a single firm is in the market; this firm has the greatest ability to control the price of its product and, therefore, the greatest amount of market power. In between these two extremes, there are the two other market structures where firms face some competition but also have market power, and for this reason, they are known as imperfect competition; they include: 1. Monopolistic competition. 2. Oligopoly. Market power is important because it gives rise to market failure or the failure to achieve allocative efficiency. The greater the market power, the greater the allocative inefficiency. Firms in perfect competition with zero market power do not result in market failure and are the only market structure where firms achieve allocative efficiency. Firms in the other three market structures result in market failure to varying degrees, with monopoly resulting in the greatest degree of allocative inefficiency. Monopoly power: The ability of a firm to influence the price of the good that it produces and sells; it is a type of market failure because it results in an under-allocation of resources to the production of the good in question, and hence in allocative inefficiency and welfare loss.