Chapter 7:

Market structures
Four market forms:

 Pure competition
 Pure monopoly
 Monopolistic competition
 Oligopoly
Characteristic Market model
Pure competition Monopolistic Oligopoly Pure monopoly
competition
Number of firms A very large Many Few One
number
Type of product Standardized Differentiated Standardized or Unique; no close
differentiated substitutes
Control over None (price takers) Some, but within Limited by mutual Considerable (price
price rather narrow interdependence; maker)
limits considerable with
collusion
Conditions of Very easy, no Relatively easy Significant Blocked
entry obstacles obstacles
Non-price Non Considerable Typically, a great Mostly public
competition emphasis on deal, particularly relations,
advertising, brand with product advertising
names and differentiation
trademarks
examples Agriculture Retail trade, Steel, motor cars, Local utilities
dresses, shoes farm implements,
many household
appliances

Pure competition (146) – (marginal revenue and price are equal)

 The demand curve is perfectly elastic at the market price.

 The firms demand curve is also its average-revenue schedule. Price per unit to the
purchaser is also revenue per unit or average revenue to the seller
 Total revenue for each sales level is found by multiplying price by the corresponding
quantity the firm can sell
 Marginal revenue
o Is the change in total revenue (or the extra revenue) that results from selling
1 more unit of output
 Total revenue is a straight line that slopes upward to the right.
 Here the demand curve (D) is horizontal, indicating perfect price elasticity. The
marginal revenue (MR) curve coincides with the demand curve because the product
price (and hence MR) is constant. The average revenue (AR) curve equals price and
therefore also coincides with the demand curve.
Profit maximisation in the short run
The purely competitive firm is a price taker, it can maximise its economic profits (or
minimise its loss) only by adjusting its output.
There are two ways to determine the level of output at which a competitive firm will realise
maximum profit or minimum loss.

 Compare total revenue and total costs

 Compare marginal revenue and marginal costs
Pure monopoly
Monopoly demand – following three assumptions are made

 Patents, economies of scale or resource ownership secure our monopolist’s status

 No units of government regulate the firm
 The firm is a single-price monopolist; it chargers the same price for all units of output
The demand curve for the monopolist (and for any imperfectly competitive seller) is very
different to that of the pure competitor. Because the pure monopolist is the industry, its
demand curve is the market demand curve. The monopolist demand curve is downward
sloping.
Remember that quantity demanded increases as price decreases
The downward sloping demand curve has three implications that are essential to
understanding the monopoly model: