Chapter 9

Market Structure: Perfect Competition,

Monopoly and Monopolistic Competition
 Market Structures

Less Competitive
More Competitive

Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Market Structures
 Perfect Competition

• Large number of buyers and sellers

• Buyers and sellers are price takers
• Product is homogeneous
• Perfect mobility of resources
• Economic agents have perfect
knowledge
• Free entry and Exit
• Example: Stock Market, Forex Mkt.
 Monopolistic Competition

• Many sellers and buyers

• Differentiated product
• Selling costs (Advt exp.)
• Perfect mobility of resources
• Example: Fast-food outlets,
branded consumer goods etc
 Oligopoly

• Few sellers and many buyers

• Product may be homogeneous or
differentiated
• Entry into the industry is possible, but
it is difficult.
• Barriers to resource mobility
• Example: Automobile manufacturers
 Monopoly

• Single seller and many buyers

• No close substitutes for product
• Barriers to entry – impossible or very
difficult
• Significant barriers to resource
mobility
Perfect Competition:
Price Determination
 Price, Average Revenue and Marginal Revenue of a
Firm under Perfect Competition
Average                 Marginal 
Quantity Price Total Revenue
Revenue (3÷1) Revenue (ΔTR)
( 1 ) ( 2 ) ( 3 ) ( 4 ) ( 5 )
1 50 50 50 50
2 50 100 50 50
3 50 150 50 50
4 50 200 50 50
5 50 250 50 50
6 50 300 50 50
7 50 350 50 50
8 50 400 50 50
9 50 450 50 50
 Perfect Competition:
Price Determination
QD  625  5P
QS  175  5 P
QD  QS = 625  5 P  175  5 P
450  10P
P  $45
QD  625  5 P  625  5(45)  400
QS  175  5P  175  5(45)  400
 Perfect Competition:
Short-Run Equilibrium

Firm’s Demand Curve = Market Price

= Marginal Revenue
Equilibrium level of output: P= MR = MC

Firm’s Supply Curve is that part of Marginal

Cost curve, where Marginal Cost > Average
Variable Cost
 Perfect Competition:
Short-Run Equilibrium
 Perfect Competition:
Long-Run Equilibrium
Quantity is set by the firm so that :
Price = Short run Marginal Cost = Short run
Average Total Cost

At the same quantity, in long-run:

Price = Long run Marginal Cost = Long run
Average Cost, OR
P = SMC = SAC = LMC = LAC
 Perfect Competition:
Long-Run Equilibrium

Economic
Profit = 0
Competition in the
Global Economy

Domestic Supply

World Supply

Domestic Demand
Exchange Rates & Competitiveness in the
Global Economy

• Foreign Exchange Rate

– Price of a foreign currency in terms of the
domestic currency
• Depreciation of the Domestic Currency
– Increase in the price of a foreign currency
relative to the domestic currency
• Appreciation of the Domestic Currency
– Decrease in the price of a foreign currency
relative to the domestic currency
Competition in the Global Economy:
Determination of Exchange Rates

Exchange Rate(R) = Rupee Price of Dollars

Supply of Dollars

Demand for Dollars

 Monopoly
• Single seller that produces a product
with no close substitutes
• Existence of Barriers to Entry
• Sources of Monopoly
– Control of an essential input to a product
– Patents or copyrights
– Economies of scale: Natural monopoly
– Government franchise: Post office
 Monopoly
Short-Run Equilibrium
• Demand curve for the firm is the market
demand curve
• Firm produces a quantity (Q*) where
marginal revenue (MR) is equal to
marginal cost (MC)
• Exception: Q* = 0 if average variable
cost (AVC) is above the demand curve
at all levels of output
 Monopoly
Short-Run Equilibrium

Q* = ?
P* = ?
 Monopoly
Long-Run Equilibrium

Q* = 700
P* = $9
Consumer Surplus
a. Consumer surplus is the area below the demand
curve and above the price. The reason is that this is
the difference between what people value the good
and what the good actually costs. If a product costs $5,
and a consumer values it at $10, their consumer
surplus is $10-$5 = $5. If a product costs $5, and one
person values it at $10, one at $9, one at $8, one at
$7, and one at $6, the total consumer surplus is
$5+$4+$3+$2+$1. This sum is the area under the
demand curve and above the price. (People who value
the good at less than $5 don't buy it, and so don't
receive consumer surplus. The area under the total
demand curve is what the consumer surplus would
have been if price was $0.

b. Producer surplus is the area above the supply

curve and below the price. The reason is that this is
the difference between how much producers make and
how much producers would have been willing to sell
the good for. If a good costs $5 and one producer
would have been willing to sell it for $0, one at $1, one
at $2, one at $3, and one at $4, the total producer
surplus is $5+$4+$3+$2+$1. (In competitive
markets, the area under the total supply curve
would be the total cost of producing an infinite
amount of goods.

a and b don't necessarily have the same area.

Social Cost of Monopoly
 Example - 1
ABC Concrete is a Monopoly supplier of concrete. Its total
revenue function and total cost function are as follows:

TR = 480Q – 8Q2 ; TC = 400+ 8 Q2 .

a) What are the profit maximising quantity and price?

b) What would be the equilibrium quantity and price, if it was a
perfectly competitive market?
Example - 2
 Monopolistic Competition

• Many sellers of differentiated (similar but not

identical) products
• Limited monopoly power

• Downward-sloping demand curve

• Increase in market share by competitors
causes decrease in demand for the firm’s
product
• Selling costs
Monopolistic Competition
Short-Run Equilibrium
Monopolistic Competition
Long-Run Equilibrium
Profit = ??
Monopolistic Competition
Long-Run Equilibrium
Cost with selling expenses

Cost without selling expenses

 Example - 3
India Software Solutions Ltd. operates in a monopolistically
competitive market. The demand equation faced by the
company is given by: P = 350 – Q . Company’s long-run total
cost equation is given by: TC = 355Q – 2Q2 + 0.05Q3 .
(a) What are the equilibrium output and price for the company?
(b) Compute the economic profit of the company, in equilibrium.

1 1
Quadratic Formula

b 2  4 ac

1 1