LECTURE OUTLINES

Chapter 9:
Market structure
Overview
 Market structures: an overview

Four different market structures

• Perfect competition
It refers to the competitive
environment in which the
buyers and sellers of the
• Monopolistic competition product operate.

• Oligopoly

• Monopoly
Figure 9-1: Market structures (Textbook page 186)
 Key features of a market structure:

Table 9-1: Summary of market structures (Textbook page 187)

 The equilibrium conditions
(for any firm)
Two decisions:
• Should we produce?
• If yes, how much?

• The shut-down rule – produce only if total

revenue is equal to, or greater than, total
variable cost

• The profit-maximising rule – profit is maximised

where marginal revenue is equal to marginal
cost
• If MR > MC, output should be expanded
since it will add more to total revenue than
it does on total cost.
• If MR = MC, global point of profits
maximization
• If MR < MC, output should be reduced
since it will add more to total costs than it
add to total revenue
 Perfect competition

• Perfect competition occurs when none of the

individual market participants can influence the
price of the product
 The demand for
the product of the firm

• The firm is a price taker

• The demand curve for the product of the firm is

horizontal (perfectly elastic)
• Different possible short-run equilibrium positions
of the firm under perfect competition
– Economic profit: MR>MC
– Break even/Normal profit: MR=MC
– Economic loss: MR<MC
Figure 9-4: Different possible short-run equilibrium positions of the firm under
perfect competition (Textbook page 199)
Long-run equilibrium of the firm and
the industry under perfect
competition

• The industry will be in equilibrium in the long run

only if all the firms are making normal profits
Figure 9-6: The firm and industry in equilibrium (Textbook page 203)
 • If firms are making an economic profit – new
firms enter the market

Figure 9-7: The individual firm and the industry when the firm initially earns an
economic profit (Textbook page 203)
 • If firms are making an economic loss –
existing firms exit the market

Figure 9-8: The individual firm and the industry when the firm initially makes
an economic loss (Textbook page 204)
 Monopoly
• It is the form of market organization in which a single firm
sells a product for which there are no close substitutes.
• Government Regulation of a Monopolist firm
• There is always a chance that a monopolist will exploit
consumers (although this does not necessarily always
happen).
• Authorities worldwide monitor the situation well and if a
monopolist abuses his power (market power), the
government may decide to intervene and take action
against him.
 There are three objectives of
government intervention namely;
1. To decrease the price of the product for the
consumer
2. To increase the quantity of the product monopolist
produces
3. To reduce the economic profits made by monopolist
 THREE TAX METHODS USE BY
GOVERNMENT TO REDUCE MONOPOLY’S
PROFITS
1. Per-unit tax- where by monopoly must pay a tax for each
unit sold.
2. Lump-sum tax-where by monopoly must pay lump-sum
regardless of its revenue or size. It regarded as a fixed
costs.
3. Profit tax- where by monopoly must pay certain
percentage of profit.
It is understandable that both lump-sum and profit tax are
more preferred to the unit tax because the they reduce the
monopoly’s profit.
 MONOPOLISTIC COMPETITION
• It is defined as the form of market organization in
which there are many sellers of a heterogeneous or
differentiated product and entry into and exit from
the industry are rather easy in the long-run.
• Differential products are those that are similar but
not identical and satisfy the same basic need.
• There are few barriers to entry and exit. Producers
have a degree of control over price.
• Because the products in monopolistic competition
are differentiated this makes it possible for a firm in
kind of market to use marketing campaigns and
further product variation not only to cause the
demand for its products to increase but also to
make it less price-elastic.
• The product of monopolistic
competition are differentiated in two
ways namely;
1. Real differences
2. Imaginary differences
Monopolistic competitor has to keep the following
three variables continually in mind-in his attempt to
maximise profit:
1. The price of the product
2. The nature of product
3. Sales promotion
Monopolistic competition differs with perfect
competition in three ways namely;
1. PRICE
2. Excess capacity
3. Product variation
 OLIGOPOLY
• It is the case where there are few sellers of a
homogeneous or differentiated product.
Although entry into the industry is possible, it
is not easy (as evidenced by the small
number of firms in the industry).
• Obstacles to entry in the market.
• High expenses of advertising and promotion.
There are four models of oligopoly namely:

1. The cournot model- highlighting interdependency

2. The kinked demand curve model- in an attempt to
explain price rigidity
3. Cartel arrangements- for justifying collusion
4. The price leadership model- One way of making
necessary adjustments in oligopolistic markets
without fear of starting a price war and without overt
collusion