Characteristics of Markets

1. Perfect competition

 Many firms sell identical products to many buyers.

 There are no restrictions on entry into the industry.
 Established firms have no advantage over existing ones.
 Sellers and buyers are well informed about prices.

P Q TR TC MR MC AR TR - TC
50 0 0 10 50 -- 50 - 10
50 1 50 15 50 5 50 35
50 2 100 25 50 10 50 75
50 3 150 45 50 20 50 105
50 4 200 95 50 50 50 105
50 5 250 185 50 90 50 65
50 6 300 355 50 170 50 - 55

P = MR = MC

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 2. Monopoly
 A monopoly is a market with a single firm that is protected by barriers to entry.
 Compared to a competitive market, a monopoly sets a higher price, produces a
smaller quantity, and converts consumer surplus into economic profit.
 Natural monopolies can be regulated by the government.
 No Close Substitutes: There are no close substitutes for the good or service.
 Barriers to Entry: A constraint that protects a firm from potential competition is called
a barrier to entry. Monopolies are protected by barriers to entry.
 Monopoly can be either buyer or seller.

P Qd TC TR MC MR TR – TC
40 0 50 0 0 -- - 50
38 1 56 38 6 38 - 18
36 2 66 72 10 34 6
34 3 80 102 14 30 22
32 4 99 128 19 26 29
30 5 120 150 22 22 30
28 6 146 168 26 18 22
26 7 176 182 30 14 6
24 8 210 192 34 10 - 18

3. Monopolistic competition

 A large number of firms compete.

 Each firm produces a differentiated product.
 Firms compete on product quality, price, and marketing.
 Firms are free to enter and exit.

4. Oligopoly

The distinguishing features of an oligopoly are the presence of

 Natural or legal barriers that prevent the entry of new firms (A duopoly is an
oligopoly market with two firms.
 and so only a small number of firms compete. The firms in an oligopoly market are
interdependent—each firm’s profit depends on its actions and the actions of its
competitors. The firms have a temptation to form a cartel, which is a group of firms

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 acting together—colluding—to limit output, raise price, and increase economic
profit.

 Examples of oligopoly include cigarettes, batteries, and automobiles.