MARKET STRUCTURES
Market structure is determined by the number and size distribution of firms in
a market, entry conditions, and the extent of product differentiation. The
major types of market structure include the following:
1. Perfect competition
2. Monopoly
3. Monopolistic competition Market
4. Oligopoly
Perfect competition
Perfect competition leads to the Pareto-efficient allocation of economic
resources. Because of this it serves as a natural benchmark against which to
contrast other market structures. However, in practice, very few industries can
be described as perfectly competitive.
Assumptions/Features:
1. Large number of sellers/firms.
2. Firms are Price takers
3. Homogenous/ identical products
4. Buyers and sellers have access to perfect information about price
5. Free entry into or exit from the market
• All goods in a perfectly competitive market are considered perfect
substitutes.
• The demand curve is perfectly elastic for each of the small, individual
firms that participate in the market.
• These firms are price takers–if one firm tries to raise its price, there
would be no demand for that firm’s product. Consumers would buy from
another firm at a lower price instead.
Equilibrium in Perfect Competition:
Conditions for Equilibrium:
1. MC = MR
2. AC (ATC) = AR
In the above diagram:
MC = MR and AC = AR at Q1 given price P1
Supernormal Profits under Perfect Competition in Short Run:
In the above diagram:
MC = MR, but AC<AR, so profits are gained
Loss under Perfect Competition in Short Run:
In the above diagram:
MC = MR, but AC>AR, so there are losses.
Monopoly Market
The term Monopoly means ‘alone to sell’. In a monopoly market, there is a single
seller of a particular product with no strong competition from any other seller.
Assumptions/Features:
1. Single seller/firm
2. Firms are Price makers
3. Unique product
4. Buyers and sellers do not have access to perfect information about price
5. Strong barriers for entry into or exit from the market
• The demand curve in monopoly market is a downward sloping curve
showing that as monopoly decreases (increases) prices, quantity
demanded increases (decreases) for the firm.
• The MR curve is steeper than the AR curve because when both MR and
AR all, MR falls at a greater rate.
Equilibrium in Monopoly:
Conditions for Equilibrium:
1. MC = MR
2. AC (ATC) = AR
Q
In the above diagram:
MC = MR and AC = AR at Q given price P
Supernormal Profits under Monopoly in Short Run:
In the above diagram:
MC = MR, but AC<AR, so profits are gained by Monopoly
Loss under Monopoly in Short Run:
In the above diagram:
MC = MR, but AC>AR, so there are losses for Monopoly
Monopolistic Market
In monopolistic competition, the market has features of both perfect
competition and monopoly. A monopolistic competition is more common than
pure competition or pure monopoly.
Assumptions/Features:
1. Large number of sellers/firms.
2. Firms have little influence on price.
3. Both Homogenous (identical) and Heterogenous (differentiated)
products
4. Buyers and sellers have access to perfect information about price
5. Non-price competition – this means competition in the market occurs
because of product differentiation and not price change
6. Free entry into or exit from the market
• The demand curve in monopolistic market is less steeper than that of a
Monopoly because a monopolistic firm has little influence on price
unlike a Monopoly which is a price maker.
• The MR curve is steeper than the AR curve because when both MR and
AR all, MR falls at a greater rate.
Supernormal Profits under Monopolistic market in Short Run:
In the above diagram:
MC = MR, but AC<AR, so profits are gained
Loss under Monopolistic market in Short Run:
In the above diagram:
MC = MR, but AC>AR, so there are losses
{ Note: AC (Average Cost) and ATC ( Average Total Cost) are the same thing. }