Comparing Market Structures

	Perfect Competition	Monopolistic competition	Oligopoly	Monopoly
Number of firms	Many	Many	A few	One
Freedom of entry	Easy	Easy	Difficult	Very difficult
Nature of product	Identical/ Homogeneous	Differentiated	Homogeneous / Differentiated	Unique
Implications for demand curve	Horizontal	Downward sloping – elastic	Downward sloping – inelastic	Downward sloping – most inelastic
Average size of Firms	Small	Relatively small/ Medium	Large	Very large
Possible consumer demand	Low	Low/Medium	Medium / Strong	Strong
Profit making possibility	None	Low / Medium	Medium /Strong	Strong
Government intervention	None	None	Medium	Strong
A new example	Wheat	Optical stores	Steel	Postal Services
Control over pricing	None	Low	Moderate/ Substantial	Substantial

FOUR different market structures with graphs below comparing the demand, costs, revenue, output and profits:

Perfect Competition

At an output of QE, the average cost is C, and the average profit is equal to the distance PC.  The total profit is equal to the average profit times the quantity produced.  This is represented graphically by yellow shaded area.  Image Source Page:http://jimluke.com/teachingportfolio/examples/unit8/jimsguide.html

 

Monopolistic Competition

D is an elastic demand curve with its associated marginal revenue curve MR.  ATC and MC are the normal U-shaped cost curves.  The area Pbq0 represents total revenue.  Similarly, Caq0 represents total costs.  If we subtract costs from revenue, we get an economic profit, which is represented by shaped area PbaC.

Monopoly

We show the firm producing output 20 quantity, the level of output where MR = MC. At that level of output the firm sells its product for $10 per unit.   This means the firm's total revenue is 10 x 20 = 200. At 20 units of output ATC = 7,  so total cost is 20 x 7 = 140. So profit = TR - TC = 200 - 140 = 60. Or average profit is 10 - 7 = 3 per unit, so profit is 20 x 3 = 60.

Image Source Page: http://www.econweb.com/Sample/Monopoly/ProfitMax13.html

                           

 

Oligopoly

The discontinuity in the marginal revenue (MR) curve is the result of the kink in the demand curve.  The MC is the original marginal cost curve. Quantity Q is the profit-maximizing output that results in price P. 

Image Source Page: http://www.businessbookmall.com/economics_26_oligopoly.html