Types of Market Structure: Perfect Competition, Monopoly, Oligopoly, Monopolistic Competition

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
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Answer a
There exist four basic types of market structure, like perfect competition, monopoly,
oligopoly and monopolistic competition, in an economy based on the degree of competition,
number of buyers, number of sellers, barriers to entry, the nature of the goods and services sold
in the market, economies of scale and so on (Baldwin & Scott, 2013). Depending on these
features, a firm or an industry is categorized as a monopoly firm, an oligopoly firm, a perfectly
competitive firm and a monopolistic competitive firm. Each type of the market structure is
described in details in the following paragraphs.
Perfect Competition: A perfectly competitive market structure is characterized by a large
number of buyers and sellers, with the sellers selling homogenous (identical) products to their
customers. Selling of standard products discourages consumer preference (Kirzner, 2015). Due
to the presence of unlimited number of sellers and consumers, none of them has the power to
influence the level of output and price of the industry. Therefore, every firm acts as a price taker.
Buying and selling take place in such market without facing any type of unnatural precincts as
well as having a perfect knowledge about the industry at that time. New firms have the freedom
to enter the market being fascinated by the scope of earning huge profit or old firms can easily
leave the market when they are suffering from extreme loss, without facing any kind of loss or
threat (Geroski & Jacquemin, 2013). In competitive market firms try to maximize their profit by
equalizing Marginal Revenue (MR) with Marginal Cost (MC). In Short Run (SR) economic
profits can be positive, negative or zero depending on the Average Total Cost (ATC). A firm
makes profit of ATC is greater than price (P) but losses when ATC is less than price (P)
(Scitovsky, 2013). This is shown in the figure below.

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Figure 1: Short Run Profit
Figure 2: Short run loss

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Figure 3: Normal profit in the short run
In Long Run when firms earn high economic profits, new firms enter the market
therefore reducing the price as well as economic profit until it reaches zero. Similarly, when
negative profits are earned, old firms leave the market causing the price level to rise along with
increase the profit till it reaches zero. Hence, in competitive market firms earn zero profit in LR
as shown in the figure 2.
Figure 4: Long Run Zero Profit