1. Markets: Perfect Competition &
Monopoly

2. What is a market structure?
A market structure – identifies how a market is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms’ behaviour – pricing strategies, non-price competition, output levels
The extent of barriers to entry
The impact on efficiency

3. Market Structures More competitive (fewer imperfections) Perfect
Competition
Pure Monopoly
More competitive (fewer imperfections)

4. Monopolistic Competition
Market Structures
Pure Monopoly
Perfect
Competition
Monopolistic Competition
Oligopoly
Duopoly
Monopoly
The further right on the scale, the greater the degree of monopoly power exercised by the firm.

5. Features of Four Market Structures

6. Market Structures Why is it important?
Degree of competition affects the consumer – will it benefit the consumer or not?
Impacts on the performance and behaviour of the company/companies involved

7. Market Structures Models – a word of warning!
Market structure deals with a number of economic ‘models’
These models are a representation of reality to help us to understand what may be happening in real life
There are extremes to the model that are unlikely to occur in reality
They still have value as they enable us to draw comparisons and contrasts with what is observed in reality
Therefore, models help in analysing and evaluating – they offer a benchmark

8. Market Structures Characteristics of each model:
Number and size of firms that make up the industry
Control over price or output
Freedom of entry and exit from the industry
Nature of the product – degree of homogeneity (similarity) of the products in the industry (extent to which products can be regarded as substitutes for each other)
Diagrammatic representation – the shape of the demand curve, etc.

9. Market Structures
Characteristics: Look at these everyday products – what type of market structure are the producers of these products operating in?
Mercedes CLK Coupe
Bananas
Canon SLR Camera
Vodka
Electric Guitar – Jazz Body
Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry.
You might even have to ask what the industry is??

10. Perfect Competition One extreme of the market structure spectrum
Characteristics:
Large number of firms
Products are homogenous (identical) – consumer has no reason to express a preference for any firm
Freedom of entry and exit into and out of the industry
Firms are price takers – have no control over the price they charge for their product
Each producer supplies a very small proportion of total industry output
Consumers and producers have perfect knowledge about the market
Distinction between short and long run
normal profits
supernormal profits

11. Perfect Competition Short-run equilibrium of the firm Price Output
given by market demand and supply
Output
where P = MC
Profit
(AR – AC) × Q
possible supernormal profits 4

12. Short-run equilibrium of industry and firm under perfect competitionAC MC P S D AR
D = AR
= MR Pe AC O O Qe
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

13. Loss minimising under perfect competitionAC MC P S AC
D1 = AR1
= MR1
AR1 Qe P1 D O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

14. Short-run shut-down point
AVC P AC MC S D2
AR2
D2 = AR2
= MR2 P2 O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

15. Perfect Competition Short-run equilibrium of the firm (cont.)
short-run supply curve of firm
the MC curve
Short-run supply curve of industry
sum of supply curves of firms 4

16. Perfect Competition The long run long-run equilibrium of the firm
all supernormal profits competed away 5

17. Long-run equilibrium under perfect competition
Profits return
to normal
New firms enter
Supernormal profits
LRAC P S1 D Se P1
AR1 D1 PL
ARL DL O O QL
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

18. Perfect Competition The long run long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR 5

19. Long-run equilibrium of the firm under perfect competition
LRAC
Long-run equilibrium of the firm under perfect competition
(SR)MC
(SR)AC
AR = MR DL
LRAC = (SR)AC = (SR)MC = MR = AR O Q

20. Perfect Competition The long run
incompatibility of economies of scale with perfect competition
Does the firm benefit from operating under perfect competition? 5

21. Monopoly
Pure monopoly – where only one producer exists in the industry
In reality, rarely exists – always some form of substitute available!
Monopoly exists, therefore, where one firm dominates the market
Firms may be investigated for examples of monopoly power when market share exceeds 25%
Use term ‘monopoly power’ with care!

22. Monopoly
Monopoly power – refers to cases where firms influence the market in some way through their behaviour – determined by the degree of concentration in the industry
Influence prices by influencing output
Erect barriers to entry e.g. economies of scale, brand loyalty, aggressive tactics
Pricing strategies to prevent or stifle competition
May not pursue profit maximisation – encourages unwanted entrants to the market
Sometimes seen as a case of market failure

23. Monopoly Origins of monopoly: Through growth of the firm
Through amalgamation, merger or takeover
Through acquiring patent or license
Through legal means – Royal charter, Nationalisation

24. A Monopolist Exploits Consumers

25. Monopoly
Summary of characteristics of firms exercising monopoly power:
Price – could be deemed too high, may be set to destroy competition (destroyer or predatory pricing), price discrimination possible.
Efficiency – could be inefficient due to lack of competition (X- inefficiency) or…
could be higher due to availability of high profits

26. Monopoly
Innovation - could be high because of the promise of high profits, Possibly encourages high investment in research and development (R&D)
Collusion – possible to maintain monopoly power of key firms in industry
High levels of branding, advertising and non-price competition

27. Monopoly
But…note:
Monopolies not always ‘bad’ – may be desirable in some cases but may need strong regulation
Monopolies do not have to be big – could exist locally

28. Monopoly
The monopolist's demand curve
downward sloping
MR below AR 8

29. AR and MR curves for a Monopoly
AR, MR (£) AR
Quantity MR

30. Monopoly
Equilibrium price and output
MC = MR 8

31. Profit maximising under MonopolyMC MR O Qm Q

32. Monopoly
Measuring level of supernormal profit 8

33. Profit maximising under MonopolyMC AC AR AR AC MR O Qm Q

34. Profit maximising under monopolyMC
Total profit AC AR AR AC MR O Qm Q

35. Monopoly Monopoly versus perfect competition
lower output at a higher price
Short-run and long-run 8

36. Equilibrium of industry under perfect competition and monopoly: with the same MC curve
AR = D MR
Monopoly P1 O Q1 Q

37. Equilibrium of industry under perfect competition and monopoly: with the same MC curveMC
Comparison with
Perfect competition P1 P2
AR = D MR O Q1 Q2 Q

38. Monopoly Costs under monopoly i.e. the benefits of economies of scale8

39. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MCmonopoly P1
AR = D MR O Q1 Q

40. MC perfect competition
Equilibrium of industry under perfect competition and monopoly: with different MC curves
MC perfect competition
MCmonopoly P2 P1
AR = D MR O Q2 Q1 Q

41. Market Structures

42. Market Structures