MARKET STRUCTURES

AND PRICE-OUTPUT
DETERMINATION
DR. JOFREY R. CAMPOS
• The various market structures are represented by four basic
market models. These are theoretical frameworks for existing
firms and industries in the real world.
• In other words the market models are not the complete replica
of realities. But such market models are important because they
help us understand the real world where the market system is
the principal element of the economy.
• Economic efficiency is the relationship between input and
output.
• The first and most important goal of the economic system
should not be economic efficiency but social equity.
 Basic Market Models
1. Perfect/pure type
a. Perfect or pure competition
b. Pure monopoly
2. Imperfect/non-pure type
a. Monopolistic competition
b. Oligopoly
• Pure competition – is a market situation where there is
a large number of independent sellers offering identical
products.
• Pure monopoly – refers to a market situation where
there are only one seller or producer supplying unique
goods and services. A one-buyer market situation is
known as monopoly.
• Oligopoly – is associated with a market situation where
there’s are few firms offering standardized or
differentiated goods and services. On the other hand, a
few buyer market situation is called oligopsony.
 Determinants of Market Structure
1. Government laws and policies. In the case of transportation and
communication, the government may require only one or two firms to operate
in certain regions of the country. To prevent abuses of monopolistic firms, the
government regulates their operations.
2. Technology. Because of technology good or better substitutes have been
enveloped. Thus, monopoly has been transformed into oligopoly, or even
monopolistic competition in some cases.
3. Business policies and practices. The presence of giant firms discourage entry
of new firms with little resources. In some cases, the bigger firms resort to cut-
throat competition which is an unfair business practice to drive away their
competitiors.
4. Economic freedom. The existence of economic freedom right to own private
properties, the right to engage in any lawful business, the right to accumulate
income and other similar economic freedom associated with a free-enterprise
economy have somehow changed market structures.
 Price and Output Determination
• Pure competition. The demand curve of an individual
firm under a purely competitive industry is perfectly
elastic. This is because the decrease of increase of the
output of a single seller has no effect on the total supply
and market price. However, in the case of market
demand curve (demand curve of all producers of a
particular product), it is inelastic.
 Demand and revenue schedule of a
purely competitive firm
demand, marginal revenue and total
revenue of a purely competi ti ve fi rm
Quantity Total
Price Marginal Revenue 30
Demanded Revenue

25

5 1 5 5 20

price and revenue

D = MR
TR
5 2 10 5 5 15

10
5 3 15 5 5

5
5 4 20 5 5

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
5 5 25 5 5
quantity demanded
Short-run equilibrium of a firm under pure competition which
indicates at a price P4 per unit as the most profitable output. This
is determined by the intersection of MR and MC curves where
MR = MC (or the equilibrium of the competitive firm which is also
profit maximization). Note that the MR or price is higher than
average cost. This means the competition firm is earning pure
profit. Such profit attracts more firms to enter the industry.
 Short-run equilibrium of a firm under
pure competition
Price Units MC AC SHORT RUN EQUILIBRIUM OF A FIRM
UNDER PURE COMPETITION
1 20 4 6

2 40 2 3 5

3 60 3 3 4

4 80 4 3
MC
AC

pRICE
3

5 100 5 4 2

6 120 5 1

0
0 20 40 60 80 100 120 140

UNITS
Less minimization of a competitive firm in a short-run
is indicated by an average cost higher than price or
MR. This means the firm is losing. To minimize loss,
the firm should produce an output where price = MC
(or MR = MC)
 Less minimization of a competitive
firm in a short-run
Price Quantity MC AC MR LESS MINIMIZATION OF A COMPETITIVE
1 50 50 4 FIRM INA AHORT RUN
12
2 60 60 6 4
3 70 70 6 4 10

4 90 90 5 4 8

4 90 90 5 4 MR = Price
MC

PRICE
6
5 100 100 5 4 AC

6 110 105 6 4 4
Loss
7 120 110 7 4
2
8 130 115 8 4
9 140 120 9 4 0
40 60 80 100 120 140 160

QUANTITY
10 150 10 4
Long-run equilibrium position of a competitive firm where MR
= MC = AC = Price. Curing the short=run period, an efficient
firm and other firms in the industry do enjoy pure profits or
economic profits. This means their revenue is higher than their
costs of production. Such situation induces new firms to enter
the market. This increases supply and decreases prices. Thus,
in the process of competition, pure profit is ultimately
eliminated. Only normal profit remains (revenue is equal to
cost).
 Long –run equilibrium position of
competitive firm
Price Quantity MC AC MR LONG RUN EQUILIBRIUM POSITION OF
1 20 1 6 4 COMPETITIVE FIRM
2 40 2 5 4 8

3 60 3 4 4 7

4 80 4 4 4 6

5 100 5 4 4 5
MR
MC
6 120 6 5 4

PRICE
4 AC

7 140 7 6 4 3

8 160 7 4 2

9 180 4 1

10 200 4 0
0 50 100 150 200 250

QUANTITY
Pure monopoly. There is only one firm that produces the
product. The demand for the product of the firm is the same as
the market demand for the product. Since there is only one
firm, it is also the industry. Its demand curve is the industry
demand curve which is down sloping. This means a
monopolists can only increase his sales by offering lower unit
price for its product.
 Demand and revenue schedule of a
pure monopolist
QD Demand Price TR MR DEMAND AND REVENUE SCHEDULE OF A
1 7 5 50 PURE MONOPOLY
160
2 6 45 90 40
140
3 5 40 120 30
120
4 4 35 140 20
100

5 3 30 150 10 80
TR
MR

PRICE
6 2 25 150 0 60
D

7 1 20 140 -10 40

20

0
0 1 2 3 4 5 6 7 8

-20

UNITS
Price output determination under pure monopoly
is shown and explained thorough graphical
illustrations. The graph indicates the profit-
maximizing and loss minimizing positions of a
pure monopolist.
Profit maximization under the pure monopoly
Price Demand Quantity MC AC MR
PROFIT MAXIMIZATION UNDER PURE MONOPOLY
1 1 9 6.5 12

2 2 8 6
10
3 3 7 5.5
4 4 1 7 5 8
Monopoly profit
5 5 2 7 4.5

PRICE
6
6 12 6 3 8 4
7 10 7 4 9 3.5 4

8 8 8 5 10 3
2
9 6 9 6 2.5
10 4 10 7 2 0
0 2 4 6 8 10 12

QUANTITY

MR MC AC Demand
Monopolistic competition. The demand curve of
a firm under this market structure is highly
elastic (but not perfectly elastic like that of the
firm under pure competition) because of the
presence of relatively large number of
competitors selling close-substitute product.
Short-fun profits/loss and long run equilibrium
of a firm under monopolistic competition
Price Quantity D AC MC MR
SHORT-RUN PROFITS OF A FIRM UNDER MONOP-
1 1 7 7 OLISTIC COMPETITION
2 2 6.4 2 6 10

3 3 6 3 5 9

4 4 5.4 4 4 8

5 5 8 5.4 5 3 7

6 6 4 5.6 7 2 6 D
MR
7 7 1 5.8 9 1

PRICE
5 Profit MC
AC
8 8 6 4

9 9 7 3

10 10 8 2

0
0 2 4 6 8 10 12

QUANTITY
• Oligopoly. Under this market structure, there are very
few firms which produce homogenous or differentiated
products. Collusion is common practice among the
oligopolists. This secret agreement among them to have
a common price and to manipulate their output for their
own business interest.
• Under the non-collusive oligopoly, the demand curve of
a firm is “kinked” (which means short twist).
 The Demand curve (under non-
collusive oligopoly)
Price Quantity D Demand curve (under non collusive
oligopoly)
1 1 10
12

2 2 9.5
3 3 9 10

4 4 8.5 8

5 5 8 D

PRICE
6

6 6 4 D
4

7 7 2
8 8 2
D1

9 9 0
0 2 4 Q1 Q62 Q3 8 10 12

10 10 QUANTITY