ECON 205 Final Review

Market structure
1. Perfect competition (agricultural markets, rarely observed in the real world)

2. Monopolistic competition (retail trade such as restaurants, hair salons, furniture stores…)
3. Oligopoly (companies in oligopolistic industries include large-scale enterprises such as
automobile companies and airlines)
4. Monopoly (created naturally or by gov)
governments can create a monopoly, such as electrical power companies, Canada Post,
Via Rail; or monopolies can occur because of the sole ownership of a natural resource,
such as the oil industry in Saudi Arabia
Attributes of Market Structures
Perfect Monopolistic Oligopoly Monopoly

competition competition
# of firms Large number of Many sellers, Few sellers, One firm, the
sellers, each each small large sole supplier
very small
Type of product Standard Somewhat Identical or Unique, no close

product differentiated differentiated substitutes
(H&M >< GAP) (Air Canada ><
WestJet)
Market power / None; price Some; price Some; price Great; price
influence over takers makers makers setters
price
Barrier to No barrier to Few barriers Substantial Substantial

enter/exist enter or exist barriers to entry barriers; blocked
totally
Ease of entry Very easy Fairly easy Difficult Very difficult

and exit of firms
Perfect competition:
Total Revenue = Price * Quantity
Total revenue is used to find two other revenue concepts:
Average Revenue = Total Revenue (TR) = Price*

Total Output (q)
Marginal Revenue = Change in Total Revenue (ΔTR) = Average Revenue = Price*

Change in Total Output (Δq)
*only applied for perfect competitors because of their horizontal demand curve.
- The profit-maximizing output rule

MR = MC. This means:
MR > MC : increase output
MR < MC : decrease output
- Breakeven: minimum of AC curve.
- Shutdown: intersection of MC and AVC
- Shut down if P < AVC
Monopolistic Competitors
Many industries fall somewhere between the polar cases of perfect competition and monopoly
-> imperfect competition.
- Characteristics of monopolistic competition:
- Many sellers
- Each firm produces a differentiated product
- Each firm has some market power - price makers - they can set their own price
for their product/service (monopoly can set the price)
- Few entry barriers -> easy to enter/exit: firms can enter or exit when there is
profit or loss.
Profit maximization: MR = MC. its setting price is similar to the monopoly.

- In the short-run, a monopolistic competitor can earn a profit, a loss, or breakeven (similar
to both extremes).
Revenue conditions for a monopolistic competition
- When firms are making profits, new firms have an incentive to enter the market
- This entry increases the # of products -> reduce the demand faced by each firm already
in the market -> demand shifts leftward -> MR also shifts leftward. This happens until
Price = ATC : breakeven (revenue = cost, Demand is tangent to ATC).
In the long-run, monopoly can breakeven or earn profit.
Monopoly:
- Price setter
1. Monopoly resources: Restricted ownership of resources

i. Ex: De Beers diamonds
2. Increasing returns to scale:
3. Monopolies arise because a single firm can supply a good/service to the entire market at
a smaller cost than two or more could.
4. Also known as Natural Monopoly: As we increase our output, our costs decrease.
i. Ex: public utilities (water, electricity)
ii. For the most part, these are excludable but not rival
5. Gov-created monopolies & legal obstacles (patent - esp for pharmaceutical products,
trademark, …)
i. Market experience
ii. Market abuses: a firm charges a sustainably low price to prevent other
firms from entering the market (new entrants will lose profit and drop out,
then the incumbent increases the price again).
iii. Intimidating potential competition through advertising: Nike & Adidas
1. New entrants can’t compete / can’t spend that much money on
ads as the incumbents
The key difference between a competitive firm and a monopoly is the monopoly’s ability
to influence the price of its output
- A monopoly’s (i.e., monopolist) demand curve is the same as the market demand
- The market demand curve provides a constraint on a monopoly’s ability to profit from its
market power
Revenue conditions for a monopoly:

- Assume the firm is profit maximizer
- A monopolist’s average revenue is the same as the downward-sloping market demand
curve (AR = Demand = Price, BUT NOT = MR)
- MR is one-half the Demand curve: it lies below the demand curve (AR)
Profit maximization for a monopoly:

MR = MC
Perfect comp:
Price = Marginal revenue = Marginal cost = Average cost
P = MR = MC = AC
A firm should produce additional units as long as its marginal revenue is greater or
equal to its marginal cost. In the short-run, the firm should shut down if its losses
exceed its fixed costs.
In the long-run, all firms in a perfectly competitive market will make Economic profit
= 0 (Economic profit = Total revenue – Total cost = 0). Long-run equilibrium will
occur at the output where Marginal cost = Average total cost (MC = ATC), which is
productive efficiency.
Monopoly:
Monopoly profit = (Price – Average total cost) × Quantity
MP = (Average revenue × Quantity) – (Average total cost × Quantity)
MP = Total revenue – Total cost
Deadweight loss = 0.5 x (Price – Marginal cost) x (Quantity provided in competitive
market – Quantity produced by monopoly)
DL = 0.5 x (P – C) x (Qc – Qm)
Oligopoly
An oligopoly is a state of limited competition, in which a market is shared by a small
number of producers or sellers. If firms within an oligopolistic industry have
cooperation and trust with each other, then they can theoretically maximize industry
profits by setting a monopolistic price.
If oligopolies collude successfully, they will set price and output such that Marginal
revenue = Marginal cost (MR = MC) for the industry overall.

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Market structure

1. Perfect competition (agricultural markets, rarely observed in the real world)

Attributes of Market Structures

Perfect Monopolistic Oligopoly Monopoly

Type of product Standard Somewhat Identical or Unique, no close

Barrier to No barrier to Few barriers Substantial Substantial

Ease of entry Very easy Fairly easy Difficult Very difficult

Total revenue is used to find two other revenue concepts:

Average Revenue = Total Revenue (TR) = Price*

Marginal Revenue = Change in Total Revenue (ΔTR) = Average Revenue = Price*

- The profit-maximizing output rule

Profit maximization: MR = MC. its setting price is similar to the monopoly.

1. Monopoly resources: Restricted ownership of resources

Revenue conditions for a monopoly:

Profit maximization for a monopoly:

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