401 Introduction to Market Structures

Ever wondered whether all those shops selling the same product actually manage to survive? How long do they remain in the competition? What keeps them in the race towards profits and survival? When do businesses close down and why?

Think bubble tea. They used to be such a craze and even though many many shops were selling the same menus of bubble tea, they still had long queues! But after a while, the bubble tea trend exhausted itself and it died down, leaving a few competitors in the market working with low sales volume. Was the competition perfect in a sense where everybody could start a bubble tea business with as little capital as possible and sold the same thing as everybody else?

Then came KOI. Its start up has been more than successful! The wait for that delicious bubble tea can last up to 30mins depending on the time of the day. Many others have attempted to achieve KOI’s success but came short. What is the source of KOI’s MONOPOLISTIC power? Is it the branding? Its ability to achieve low costs?

This is why we study market structures –  To understand the behavior of specific firms and their adverse environments. I have truly enjoyed the study of market structures because it has opened my eyes to how business start, operate, succeed and sadly, fail. I hope you will gain a great deal of knowledge about the business world from studying market structures.

At the end of this video, you should be able to:

  • Understand the concept of Equilibrium price and quantity demanded.
  • Understand the concept of marginal revenue.
  • Derive the Supply Curve.
  • Understand Profit Maximization from producing at MR=MC
  • Identify supernormal profit, normal profit and losses from Price-Quanity graphs with MC, AC, MR curves.

Additional Learning Material:

Note: The term supernormal profit may not be used by your lecturer. If your lecturer uses a different term, then go ahead and use that for your discussions and revision so that you are not confused over the terms.

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Author: admin

6 Comments

  1. Seth says:

    hi i dun understand y supply curve is a sum of the mc could u explain?

    • Oh sure! That’s because producing at any point of the MC is being productively efficient. Remember the isocost and isoquant? It shows us the firm’s cost minimizing behaviour. So from there, we derive the MC curves. So producing on the MC curves means being productively efficient. And that’s why firms produce at p=mc.

      Lastly, the market supply is the sum of all the firm’s MC because we gotta account for all the firms in the market producing the same good X.

  2. Siddharth says:

    Hey!
    I dont actually have a question here, but i just wanted to appreciate your method of teaching and your power of explanation. Its really commendable. I strongly suggest you should replace Prof. Witztum. He just just so slow and boring in the VLE online tutorials.
    Also, that confused guy you made (8:39) really made me laugh! 😀 and the way you spoke about him.. Such little things make it so much interesting to study economics. Thankyou so much for your efforts. 🙂

  3. Elena says:

    Hi. First of all thanks for very useful videos. I have a question though. In the beginning you mention that profit is calculated by taking in the consideration opportunity cost. However when the graphs are drawn (MC and AC) to show the normal and above normal profit we don’t see the opportunity cost. Is it included in the marginal cost? But from the previous videos I don’t remember that. Could you explain please?

    • admin says:

      Hi Elena,

      Opportunity cost is factored in through interest rates since the interest rate is the monetary value forgone by investing into machinery or fixed assets as capital. We also see that interest rates are factored in your isocost and isoquont model, which in turn derives your total cost curves and your MC and AC. Therefore, opportunity cost is already factored into the AC and MC> I hope that helps!

  4. Elena says:

    Thanks. I think I get it now.