Market Structures (HL)

Market structures describe the competitive environment in which firms operate, classified by the number of firms, the nature of the product, barriers to entry, and the degree of price-setting power. The four models range from intense competition to a single seller.

Perfect competition

Perfect competition is a theoretical benchmark with many small firms, an identical (homogeneous) product, no barriers to entry or exit, and perfect information. Each firm is a price taker, facing a perfectly elastic (horizontal) demand curve at the market price, so AR equals MR. The firm maximizes profit where MC = MR.

In the short run, a perfectly competitive firm can earn abnormal profit (if AR exceeds ATC), break even, or make a loss (if AR is below ATC but above AVC). In the long run, freedom of entry and