Market Structures - What you need to know for Q2.

I know lots of pupils stumble over the characteristics of the different market structures,  perfect competition, imperfect competition, oligopoly and monopoly. 

I have found that this table can be effective when answering questions as you just need to remember the left column, and then apply your knowledge about each Market type to relevant points 

Most years, you are asked to draw a labelled diagram of one of the market structures and explain the equilibrium position. Below I have put together diagrams with the long run positions for each of the market structures.

In Perfect Competition the firm is a price taker, and is met with a fixed horizontal demand curve.  The firm is selling at its lowest point on the average cost curve (most efficient point) which along with the no barriers to entry ensures that customers are not exploited. 

In Imperfect Competition the firm is met with a regular downward sloping demand curve (AR).

 The firm will usually try to maximise profits and hence produce the quantity where MC=MR. This is not the best point for the consumer as the firm is not getting the full potential benefit from economies of scale (lowest point of ac).

In Oligopoly there are only a few firms. Each firm will react to what others do hence the kinked demand curve. If firm a raises the price above the equilibrium other firms will keep their price stable and hence take some of firm a's market share. If firm a reduces their price below the market equilibrium price, others will follow them down and all of the firms market share will remain constant.

In Monopoly there is only one firm and the firm faces a downward sloping demand curve. The firm can choose the price of the good or the quantity made available for sale but not both. Monopolists will usually produce the quantity where MC =MR as this is the most profitable point.  

**** Exam Analysis ****

Market Structures comes up every year and is usually question 2 in the long questions. There is nearly always a short question as well, so that means it could account for as much as 22% of your exam in June. 

Beware of questions which make a statement such as "European short haul airlines operate under conditions of Imperfect competition or Oligopoly.... as the statement will often be false and you must agree or disagree as appropriate. The best way to answer such a question is to apply the table above and think does the European short haul airline apply to the market structure in the question. 

Sample Mock Questions