Comparing Market Structures

Type of market:	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
number of firms	numerous	many	few	one
freedom of entry	easy	easy	difficult	difficult or inaccessible
implications for demand curve	horizontal, price takers	slopes down, elastic	slopes down more, less elastic	slopes down even further, inelastic
average size of firms	small	small	large	large
nature of product	identical	similar but differentiated	identical or differentiated	exclusive
possible consumer demand	perfectly elastic, depends on price	relatively elastic, depends on product differentiation	relatively inelastic or elastic, depends on product differentiation	inelastic
profit making possibility	normal profits	economic profits in the short-run and normal profits in the long-run	economic profit	economic profit, depending on government intervention
government intervention	no	no	sometimes, through quotas and licenses	sometimes, through taxes, price control and nationalization
a new example	dairy farm	American Apparel	Telus	NBA
concentration ratio	very low	low	fairly high	very high

Perfect Competition



The horizontal demand curve represents a perfectly elastic demand. Therefore, we know that price = average revenue = marginal revenue. Since sellers are price takers, they only have control over levels of output. The profit maximising level of output is reached when marginal revenue equals marginal cost. In this graph the average cost is equal to average revenue, meaning the seller is making normal profits. In the short-run, economic profits can be achieved if average cost is less then average revenue.

The downward sloping demand curve demonstrates a fairly elastic demand, although this varies among firms depending on product differentiation. The most favourable quantity to be produced  is found where marginal revenue is equal to marginal cost. The price is determined by the demand curve and is the highest amount that can be charged while selling the desired quantity. In the short-run, as shown, the difference between the firms average revenue and average cost multiplied by the quantity sold is equal to the economic profit. In the long-run the demand curve will shift to the left and goods will no longer be sold above average costs, resulting  in normal profits.

Oligopoly

Oligopolies exemplify a kinked demand curve because at higher prices demand is elastic and at lower prices it is inelastica. The current market price is determined when marginal revenue is equal to marginal cost, which also generates maximum profits. Here the marginal revenue curve will become vertical reflecting the resistance towards a change in price.

Monopoly

The optimum profit is obtained when marginal revenue is equal to marginal cost, determining the desired output quantity and price which lies between the two break even points. These are present where the average cost curve crosses the demand curve. The marginal revenue curve is always below average revenue and as long as it's positive the total revenue must be increasing. Producing output at any price between the average cost and demand curves will conclude with economic profits and if the two are equal normal profits will result.

Resources:

 

Sayre, J.E. & Morris, A.J.  (2009).  Principles of Microeconomics (6th ed.).  Toronto, ON: McGraw-Hill Ryerson

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