MARKET STRUCTURE:

Perfect Competition and

Monopoly
Market Structure
 Refers to the competitive environment in which the buyers and sellers of the
product operate.

 The market structures are defined in terms of:

 Number and size of buyers and sellers of the product
 Type of product bought and sold
 Degree of mobility of resources
 Degree of knowledge that economic agents have of prices and costs, and
demand and supply conditions.
Types of Market Structures
1. Perfect Competition
Characteristics:
 There are large buyers and sellers of a product, each too small to affect the
price
 Price taker
 Product is homogenous
 There is perfect mobility of resources
 Economic agents have perfect knowledge of market conditions
 Easy entry/exit of firms into the market
 No non-price competition
 THE DEMAND CURVE

INDUSTR
Y FIRM
P P
S

4.5 4.5 D=P=MR

Q
Q
 Determination of Profit Maximization
Approaches:
1. TR-TC approach
 TR > TC = Economic profit
 TR= TC = Normal or Zero Profit/Break-even
 TR < TC = Loss

2. MR = MC approach
Rule for Profit Maximization:
The Most Profitable Output (MPO) – the output where the value of
MR = MC.
Average Revenue (AR) – the revenue earned per unit of output
AR = TR/Q
Marginal Revenue (MR) – the additional revenue earned in producing an additional unit of output
MR = ∆TR/ ∆Q = TR₂ - TR₁ /Q₂ - Q₁

Per unit Profit/Loss:

 P or AR > ATC = Economic Profit
 P or AR < ATC = Loss
 P or AR = ATC = Break-even
 Exercise:
Given below is a short-run cost and revenue schedule of a perfectly competitive firm.
Complete the schedule.

Q P TR TC TFC TVC AVC ATC MC MR Total Per Unit

Profit Profit

0 10 0 80 80 0 - - - - -80 -
20 10 200 250 80 170 8.5 12.5 8.5 10 -50 -2.5

40 10 400 400 80 320 8 10 7.7 10 0 0

60 10 600 500 80 420 7 8.33 5 10 100 1.67
80 10 800 700 80 620 7.75 8.75 10 10 100 1.25
100 10 1000 950 80 870 8.7 9.50 12.5 10 50 0.50
Analysis:
1. The MPO = 80.
2. At the MPO:
a. TR = 800
b. TC = 700
c. Total profit = 100
d. Per unit revenue = 10
e. Per unit cost = 8.75
f. Per unit profit = 1.25
3. The firm is at break even at 40 units.
4. The firm incur losses from 0 to 20 units of output.
Loss analysis:
 If P < ATC but > AVC ;Loss < TFC, continue producing
 10 < 12.5 but > 8.5; 2.5 < 80, continue production

 If P < ATC but = or < AVC; or Loss = TFC, stop producing.

Long –run. A firm is in the long-run equilibrium if there is no incentive for firms to enter nor to leave
the industry. It is at the point where the price = long-run marginal cost and marginal revenue. In this
case, the firm has no incentive to change its plant capacity.
Graphical Analysis
Cost &
revenue MC
P>ATC = ECO. PROFIT

MPO = 6
At the MPO:
TR = PxQ, 5 x6 = 30
TC =ATC xQ, 3(6) =18
D=P=AR=MR
5 TP = TR-TC, 30-18 =12
ATC Per unit revenue = 5
Per unit cost = 3
3 Per unit profit= 2

Q
0 4 6
Cost &
Revenue
MC P<ATC = LOSS

ATC
LMO = 8
At the LMO:
7
D=P=AR=MR TR = PXQ/8(6)=48
6
TC = ATCXQ/8(7)=56
LOSS= TR-TC/48-56= -8
AR =6
ATC =7
Q Per unit loss = AR-ATC/6-7 = -1
0 8 9
Cost &
Revenue P=ATC = B.E
Q7 is the B.E output.
At Q7:
TR = 35
MC
TC = 35
ATC TP = 0
AR =5
ATC =5
5 D=P=AR=MR Per unit profit = 0

Q
0 7
 1.At Q7,P6: (P<ATC)
Cost & Revenue a. the firm realized/incur LOSS
b. TR = PXQ 7(6) = 42
c. TC = ATC XQ 7(7) = 49
MC d. Loss =TR-TC 42-49= -7
C e. TVC = AVC(Q) 4(7)=28
AT
f. TFC = TC-TVC 49-28-21/ATC-AVC=AFC
7-4=3/ TFC = AFCXQ = 3X7=21
8 g. Price of __6__ is ___<___ ATC of ____7_ but >
7 AVC of ___4___ and Loss of __7___ is ___<__TFC
of _______21_____, therefore the firm should
6 D=P=AR=MR
CONTINUE PRODUCTION

AVC 2. At Q5, P3: (P<ATC)

g. The firm realized/incur LOSS
4 h. TR = PXQ/3(5)=15
i. TC = ATC(Q)/8(5)=40
3 j. Loss = TR-TC/15-40=(25)/8-3x5=25
k. TVC = AVC(Q) 3(5)=15
l. TFC = TC-TVC/40-15=25/ATC-AVC=AFC 8-3
=5/AFC XQ=TFC 5X5 =25
m. Price of __3___ is __<___ATC of ___8___ but =
Q AVC of ___3_____, and Loss of __25___
0 5 7 8 ___=___ to TFC of __25___therefore the firm
should STOP PRODUCTION
2. Monopoly
4 Basic reasons that give rise to monopoly
1. Control over the supply of raw materials required to produce the product.
2. Patent/copyright – precludes other firms from using a particular
production process or producing the same product
3. Economies of scale – firm operate over a sufficiently large range of outputs
as to leave only one firm supplying the entire market.
4. Government franchise –firm is set up as the sole producer and distributor
of a product or service but is subject to government regulation.
Characteristics:
1. Single firm selling the commodity
2. No close substitutes for the commodity
3. Price maker
4. Entry into the industry is difficult
5. No non-price competition
The Firm’s Demand Curve is also the Industry’s demand curve.

MR D=P
Types of monopoly
1. Regulated monopoly
 Subject to social regulation
 Earns lower profit
 MPO P=MC

2. Unregulated monopoly
 Not subject to social regulation
 Earns more profit
 MPO P> (MR=MC)
Graphical illustration and analysis:
Cost & Revenue For Unregulated Monopoly
MPO = 5
TR = 40 (8X5)
TC = 30 (6X5)
MC TP = 10
Per unit revenue = 8
Per unit cost = 6
8 Per Unit profit = 2
7 ATC
6.5 For Regulated Monopoly
6 MPO = 7
5 TR = 49 (7X7)
TC = 45.5 (6.5X7)
TP= 3.5
D=P Per unit revenue = 7
MR Per unit cost = 6.5

0 5 7 QPer unit profit = 0.5