Exercise 9 - 2: Comparing Market Structures

Four Market Structures
	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number of Firms	Very Many	Many / Several	Few	One
Freedom of Entry	Unrestricted	Unrestricted	Restricted	Restricted or Completely Blocked
Nature of Product	Homogeneous	Differentiated	Undifferentiated or Differentiated	Unique
Implications of Demand Curve	Horizontal: Firm is a price taker	Downward Sloping but Relatively Elastic	Downward Sloping. Kinked Shape. Relatively Inelastic. (Shape depends on rivals reactions)	Downward Sloping More Inelastic Than Oligopoly. Firm Has Considerable Control Over Price.
Average Size of Firms	Small and Large (Economies of scale will encourage growth)	Small and Large	Large	Small or Large
Possible Consumer Demand	Elastic	Elastic, Firms face Individual Demand curves	Consumer demands factors include  advertising and pricing from rival firms	Consumers are limited to one choice
Profit Making Possibility	Normal Profits	Normal Profits	Normal and Economic Profit(Depends on reactions of price setting by rivals)	Economies of Scale. Normal and Economic Profits in short and Long Run
Government Intervention	Price Floors and Ceilings	Government May Limit Entry	Highly Unregulated Resulting in Cartels	Anti-Monopoly Legislation. Profits Taxes. Sales Taxes. Price Setting. Nationalization
Efficiency	Productively (P=Min AC) and Allocatively Efficient (P= MC)	Productively and Allocatively Inefficient	Productively and Allocatively Inefficient. Technological Development May Push Costs Down	Productively and Allocatively Inefficient
Examples	Corn, Onions, Broccoli	Gas Stations, Convenience Stores, Night Clubs	Cable, Phone and Internet Providers	Public Transit, Utilities

Perfect Competition Graph Example figure 9.2A This is representation is of a typical firm in a Perfectly Competetive Market. Price is set where Marginal Costs(MC) intersect the perfectly elastic demand line which is also the Average Revenue(AR) and Marginal Revenue(MR). Average Profit(AP) is the difference between Average Costs(AC) and Price(P1). Average Profit times Quantity(Q1) is the Total Profit :




Figure 9.2A

 

Monopolistically Competitive Graph Example Figure 9.2B. This repesentation of a typical Monopolistically Competitve firm has a elastic demand line(D1). Total Revenue is Price(P1) times Quantity(Q1). Total Reveue minus Total Costs(Q1 times C1) will give Economic Profit amount. Price is set where Marginal Revenue(MR) intersects Marginal Costs :



Figure 9.2B



Oligopoly Graph Example Figure 9.2C The following is example of a typical firm in a Oligopoly Market. The Kink in the demand curve has both Elastic and Inelastic sections. The profit maximizing output is (Q1). Price and Quantity equilibrium will remain the same even if Marginal Costs increase as shown in the difference between (MC1) and (MC2):



Figure 9.2C

 Monopoly Graph Example Figure 9.2D. The average firm of in a Monopoly represented by the following figure. the Demand Line is the same as Average Revenue, the break even points are where Average Revenue(AR) intersects Average Costs(AC) The profit maximizing price is where Marginal Revenue (MR) and Marginal Costs (MC) intersect and correspond with the quantity price of the Average Revenue line(AR):



Figure 9.2D