Saturday, May 5, 2012

Exercise 9-2: Comparing Market Structures

This last Blog entry for my current Microeconomics class will be a review and comparison of the four different forms of markets. I have created this table for easy comparison:


The Four Forms of Markets

Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Number of firms
Very Many
One
Many / Several
Few
Freedom of entry
Unrestricted
Restricted or blocked
Unrestricted
Restricted
Nature of product
Homogeneous (undifferentiated)
Unique
Differentiated
Differentiated or Undifferentiated
Implications for demand curve
Horizontal –
price taker
Downward sloping and very inelastic
Downward sloping and elastic
Downward slope and inelastic
Average size of firms
Small to large
Large
Small to large
Large
Possible consumer demand
Perfectly elastic
Inelastic
Elastic
Kinked (elastic above the kink and inelastic below the kink)
Profit making possibility
Normal Profit
Economic Profit
Normal Profit
Economic Profit
Government Intervention
Productive and allocative efficiency
Productive and allocative inefficiency
Productive and allocative inefficiency
Productive and allocative inefficiency
Examples
Agriculture (Farms)
Canadian Pacific Railway
Oreo cookies (brand loyalty)
Mobile phone companies
Comparison
Opposite of Monopoly
Opposite of Perfect Competition
Common form of market
Common form of market


This graph shows, that in perfect competition, total profit is the distance between Average Revenue (AR) and Average Cost (AC).




The same graph as above, but this time for a monopoly market. The two break-even points are where AC meets AR and the maximum profit is achieved where MC meets MR.




The economic profit for the monopolistic competition represented in the purple area.






In this model of an oligopoly market, demand is relatively elastic above the kink and relatively inelastic below the kink. The price and best profit point will be at the point where the kink happens.

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