The Four Types of Market Structure

Number of Firms?

Many firms
One firm Few firms

Type of Products?

Differentiated Identical
Single product
products products

Monopoly Oligopoly Monopolistic Perfect

Competition Competition

• tap water, • Search Engine • Novels • Ballpens

electricity
• Crude oil • Cellphones • Basic agri
• train
• Phils plane products
transport • PC
transport
Comparison of firms in market structures
Number of Firms Type of Products Shape of the Supply Curve
Demand Curve

Monopoly Sole Seller No close substitutes Downward-sloping Can’t be separated

(price-maker) (very unique prods) from the demand

Oligopoly Few sellers (e.g. No close substitutes Downward-sloping

duopoly, price- (unique product)
maker)

Perfect Competition Many sellers Many perfect or Horizontal Upward-sloping (SR)

(price-taker) close substitutes Horizontal (LR)

Monopolistically Many sellers but Close substitutes Downward-sloping Downward-sloping

Competitive Price-maker (little difference)
Comparison of firms
Marginal Revenue Marginal Cost Quantity that But the Price is
Maximizes Profit

Monopoly Downward-sloping, Upward-sloping Q* where MR = MC P > MR = MC (on the

below the Demand demand curve)
curve
Oligopoly

Perfect Competition Horizontal P = MR Horizontal Q* where MR = MC P = MR = MC

Monopolistically
Competitive
Monopoly versus Competition

Monopoly
Is the sole producer
Has a downward-sloping demand curve
Is a price maker
Reduces price to increase sales
Competition versus Monopoly

Competitive Firm
Is one of many producers
Has a horizontal demand curve
Is a price taker
Sells as much or as little at same price
 Demand Curves for Competitive and
Monopoly Firms...

(a) A Competitive Firm’s (b) A Monopolist’s

Demand Curve Demand Curve
Price Price

Demand

Demand

0 Quantity of 0 Quantity of
Output Output
 Example: A Monopoly’s Total, Average, and
Marginal Revenue

Average
Quantity Price Total Revenue Revenue Marginal Revenue
(Q) (P) (TR=PxQ) (AR=TR/Q) (MR= DTR / DQ )
0 $11.00 $0.00
1 $10.00 $10.00 $10.00 $10.00
2 $9.00 $18.00 $9.00 $8.00
3 $8.00 $24.00 $8.00 $6.00
4 $7.00 $28.00 $7.00 $4.00
5 $6.00 $30.00 $6.00 $2.00
6 $5.00 $30.00 $5.00 $0.00
7 $4.00 $28.00 $4.00 -$2.00
8 $3.00 $24.00 $3.00 -$4.00
 Example: Total, Average, and Marginal
Revenue for a Competitive Firm

Quantity Price Total Revenue Average Revenue Marginal Revenue

(Q) (P) (TR=PxQ) (AR=TR/Q) (MR=DT R / DQ )
1 $6.00 $6.00 $6.00
2 $6.00 $12.00 $6.00 $6.00
3 $6.00 $18.00 $6.00 $6.00
4 $6.00 $24.00 $6.00 $6.00
5 $6.00 $30.00 $6.00 $6.00
6 $6.00 $36.00 $6.00 $6.00
7 $6.00 $42.00 $6.00 $6.00
8 $6.00 $48.00 $6.00 $6.00
Demand and Marginal Revenue Curves for a Monopoly...
Price
$11
10
9
8
7
6
5
4
3 Demand
2 Marginal (average revenue)
1 revenue
0
-1 1 2 3 4 5 6 7 8 Quantity of Water
-2
-3
-4
Profit Maximization of a Monopoly

• A monopoly maximizes profit by producing the

quantity at which marginal revenue equals marginal
cost. Q* where MR = MC
• It then uses the demand curve to find the price that
will induce consumers to buy that quantity. P* > MR
= MC
 Profit-Maximization for a Monopoly...
2. ...and then the demand
Costs and curve shows the price 1. The intersection of
Revenue consistent with this the marginal-revenue
quantity (the monopoly curve and the marginal-
price) cost curve determines
B the quantity of goods
Monopoly produced that
price
maximizes profit Qmax
Average total cost
A

Demand
Marginal
cost

Marginal revenue
0 QMAX Quantity
The Monopolist’s Profit...
Costs and
Revenue
Marginal cost

Monopoly E B
price
Average total cost

Average
total cost D C
Demand

Marginal revenue
0 QMAX Quantity