8/9/2015

Market Structures

Understanding Economics

There are four main market structures:

perfect competition
monopolistic competition

Mark Lovewell

oligopoly
monopoly

4th edition
by Mark Lovewell, Khoa Nguyen and Brennan Thompson

Perfect Competition

Perfect Competition

Monopolistic Competition

Perfectly competitive markets have three main

features:

Monopolistically competitive markets have three

main features:

many buyers and sellers

many buyers and sellers

a standard product

slightly different products

easy entry and exit

easy entry and exit

Oligopoly and Monopoly

Entry Barriers

In an oligopoly a few businesses (protected by

entry barriers) provide standard or similar
products.
In a monopoly a single business (protected by
entry barriers) provides a product with no close
substitutes.

There are six main entry barriers in oligopolies

and monopolies:
increasing returns to scale
market experience
restricted ownership of resources
legal obstacles (such as patents)
market abuses (such as predatory pricing)
advertising (which is most common in oligopolies)

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Attributes of Market Structures

Market Power

Figure 5.1, Page 115

Market power:
is a businesss ability to affect the price it charges
Perfect
Competition

varies with market structure, such that monopolists

have the most and perfect competitors have the

least

Numbers of
Businesses

Monopoly

very many

many

few

one

standard

differentiated

standard or
differentiated

not
applicable

Entry and Exit of

New Business

very easy

fairly easy

difficult

very
difficult

none

some

some

great

farming

restaurants

automobile
manufacturing

public
utilities

Example

Perfect Competitors Demand (b)

Perfect Competitors Demand (a)

Market Demand and Supply

Curves for T-Shirts
Sm

Dm
0

27 000

Quantity of T-Shirts per Day

Pure n Simple T-Shirts

Demand Curve

Price ($ per T-Shirt)

Figure 5.2, page 116

A perfect competitor has a demand curve different

from the market demand curve.
The businesss demand curve is horizontal at the
prevailing market price.

Price ($ per T-Shirt)

Db

0
Quantity of T-Shirts per Day

10

Average and Marginal Revenue

Revenue Conditions for a Perfect Competitor

Total revenue is used to find two other revenue

concepts:

average revenue (total revenue divided by output)

marginal revenue (change in total revenue divided

by change in output)

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Oligopoly

Type of
Product

Market Power

Monopolistic
Competition

Average revenue equals price, so that a perfect

competitors average revenue curve is its
horizontal demand curve.
A perfect competitors average revenue (price) is
constant so that marginal revenue and average
revenue are always equal.

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Revenues for a Perfect Competitor

The Profit-Maximizing Rule

Figure 5.3, page 118

Revenue Schedules for Pure n Simple T-Shirts

Price
(P)
($ per T-shirt)

Quantity
(q)
(T-Shirts per day)

Total Revenue Marginal Revenue Average Revenue

(TR)
(MR)
(AR)
(P x q)
(TR/q)
(TR x q)

$ 0
80
200
250
270
280

$-6
6
6
6
6

0
480
1200
1500
1620
1680

480/80 = $6
720/120 = 6
300/50 = 6
120/20 = 6
60/10 = 6

output should be increased if marginal revenue

480/80 = $6
1200/200 = 6
1500/250 = 6
1620/270 = 6
1680/280 = 6

exceeds marginal cost.

output should be decreased if marginal cost

exceeds marginal revenue.

$ per T-Shirt

Revenue Curves for Pure n Simple T-Shirts

The profit-maximizing rule states that profit is

maximized when marginal revenue equals
marginal cost. This means:

Db = AR = MR

0
Quantity of T-Shirts per Day

13

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Profit Maximization for a Perfect Competitor

The Breakeven and Shutdown Points

Figure 5.4, page 120

Profit Maximization Table for Pure n Simple T-Shirts

Total
Product
(q)
0
80
200
250
270
280

Price
(P)
(=AR)

Marginal
Revenue
(MR)

$6
6
6
6
6
6

Marginal
Average
Cost
Variable Cost
(MC)
(AVC)
(TC/q)
(VC/q)

$6
6
6
6
6

$1.75
1.33
2.50
5.50
10.50

Average
Cost
(AC)
(TC/q)

Total
Revenue
(TR)
$

$1.75
1.50
1.70
1.98
2.29

$12.06
5.63
5.00
5.04
5.24

0
480
1200
1500
1620
1680

Total
Cost
(TC)

Total
Profit
(TR - TC)

$ 825
965
1125
1250
1360
1465

$-825
-485
75
250
260
215

For a perfect competitor this occurs where price

equals minimum average cost.

Profit Maximization Graph for Pure n Simple T-Shirts

MC
a
6.00

Db = MR = AR

Profit = $260

5.04

The shutdown point is the lowest price at which a

business will choose to operate in the short run.
It occurs where price equals minimum average

AC
b

$ per T-Shirt

The breakeven point is where a business breaks

even while maximizing profit.

variable cost.
AVC

270
Quantity of T-Shirts per Day

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Supply Curve for a Perfect Competitor

A Perfect Competitors Supply Curve

Figure 5.5, page 122

A perfect competitors supply curve is its marginal

cost curve above the shutdown point.
The market supply curve can be found by
horizontally adding the supply curves for all the
businesses in the industry.

Supply Curve for Pure n Simple T-Shirts

Supply Schedule for
Pure n Simple T-Shirts
Quantity
Supplied
(q)
($ per T-Shirt (T-Shirts per day)

MC(=Sb )

Price
(P)

$6.00
5.00
1.50
1.40

270
250
200
0

6.00
$ per T-Shirt

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5.00

MR1
AC
MR2

AVC

1.50
1.40
0

c
d

200

250 270

Quantity of T-Shirts per Day

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