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OCMT
Principles of Microeconomics
Unit III
11/28/2015
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UNIT III – Market Structures
Learning Objectives
1.
Types of market structure: Monopoly, oligopoly, monopolistic
competition and perfect competition
2.
Monopoly: meaning and causes
3.
Oligopoly: meaning and characteristics
4.
Monopolistic competition: meaning and characteristics
5.
Perfect competition: meaning and characteristics
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The Four Types of Market Structure
Number of Firms
Many
firms
Type of Products
One
firm
Monopoly
• Tap water
• Cable TV
Few
firms
Oligopoly
• Tennis balls
• Crude oil
Differentiated
products
Identical
products
Monopolistic
Competition
Perfect
Competition
• Novels
• Movies
• Wheat
• Milk
Copyright © 2004 South-Western
Monopoly
• While a competitive firm is a price taker, a monopoly firm is a
price maker.
• A firm is considered a monopoly if . . .
– it is the sole seller of its product.
– its product does not have close substitutes.
• Monopoly is a market structure in which a single firm makes
up the entire market.
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Causes of Monopoly
• The fundamental cause of monopoly is barriers to entry.
• Barriers to entry have three sources:
1. Ownership of a key resource
2. The government gives a single firm the exclusive right to
produce some good.
3. Costs of production make a single producer more
efficient than a large number of producers.
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Causes of Monopoly
1.
Ownership of a key resource
Although exclusive ownership of a key resource is a potential source
of monopoly, in practice monopolies rarely arise for this reason.
2.
The government gives a single firm the exclusive right to produce
some good.
Governments may restrict entry by giving a single firm the exclusive
right to sell a particular good in certain markets. Patent and
copyright laws are two important examples of how government
creates a monopoly to serve the public interest.
3.
Costs of production make a single producer more efficient than a
large number of producers.
An industry is a natural monopoly when a single firm can supply a
good or service to an entire market at a smaller cost than could two
or more firms.
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Types of Imperfectly Competitive Markets
• Imperfect competition refers to those market structures that fall between
perfect competition and pure monopoly.
• Imperfectly competitive markets are those industries in which firms have
competitors but do not face so much competition that they are price
takers.
• Imperfectly competitive markets are of two types. They are:
1. Oligopoly
2. Monopolistic Competition
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Oligopoly
Meaning of Oligopoly
Oligopoly is an imperfect market structure where only a few
sellers, each offering a similar or identical product to others.
Characteristics of Oligopoly
1. Few sellers offering similar or identical products
2. Interdependent firms
3. Best off cooperating and acting like a monopolist by producing a
small quantity of output and charging a price above marginal cost
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Monopolistic competition
Meaning
• Monopolistic competition is an imperfect market structure
where many firms selling products that are similar but not
identical. Monopolistic competition is a market structure that
has some features of competition and some features of
monopoly.
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Characteristics of Monopolistic Competition
1.
Many Sellers
There are many firms competing for the same group of
customers. Product examples include books, CDs, movies,
computer games, restaurants, piano lessons, cookies,
furniture, etc.
2. Product Differentiation
Each firm produces a product that is at least slightly different
from those of other firms.
3. Free Entry or Exit
Firms can enter or exit the market without restriction. The
number of firms in the market adjusts until economic profits
are zero.
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Perfect Competition
Meaning
• Perfect competition is a perfectly competitive market
structure in which economic forces operate unrestricted.
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Characteristics of Perfect Competition
1. There are many buyers and sellers in the market.
There are many buyers and sellers in the perfect market
competition.
2. Firms can freely enter or exit the market.
In perfect market conditions, firms can freely enter or
exit the market as they wish.
3. Both buyers and sellers are price takers.
A price taker is a firm or individual who takes the market
price as given. In most markets, households are price
takers; they accept the price offered in stores.
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4.
The number of firms is large.
Large means that what one firm does has no bearing on
what other firms do. Any one firm's output is minuscule
when compared with the total market.
5. There are no barriers to entry.
Barriers to entry are social, political, or economic
impediments that prevent other firms from entering the
market. Barriers sometimes take the form of patents granted
to produce a certain good.
6. The firms' products are identical.
This requirement means that each firm's output is
indistinguishable from any competitor's product.
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7.
There is complete information.
Firms and consumers know all there is to know about the
market – prices, products, and available technology. Any
technological advancement would be instantly known to all
in the market.
8. Firms are profit maximizers.
The goal of all firms in a perfectly competitive market is
profit and only profit. Firm owners receive only profit as
compensation, not salaries.
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OCMT
Principles of Microeconomics
Unit III
Courtesy to all authors, especially Mankiw, for the sources of their amazing subject related materials.
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