Types of Market Structures and Profit Maximization

Overview of Market Structures

Types of Market Structures

  • Perfect Competition

  • Monopoly

  • Oligopoly

  • Monopolistic Competition

Key Characteristics of Market Structures

  1. Profit Maximization

    • Condition for profit maximization across market structures:

      • Perfect Competition: $P = MR = MC

      • Monopoly: $MR = MC

      • Oligopoly: $MR = MC

      • Monopolistic Competition: $MR = MC

  2. Ability to Set Prices

    • Perfect Competition: Price Taker

    • Monopoly: Price Setter

    • Oligopoly: Price Setter

    • Monopolistic Competition: Price Setter

  3. Entry Conditions

    • Perfect Competition: Free entry

    • Monopoly: No entry

    • Oligopoly: Limited entry

    • Monopolistic Competition: Free entry

  4. Number of Firms

    • Perfect Competition: Many firms

    • Monopoly: One firm

    • Oligopoly: Few firms

    • Monopolistic Competition: Many firms

  5. Long Run Profit

    • Perfect Competition: 0 economic profit

    • Monopoly: Positive economic profit

    • Oligopoly: Positive economic profit

    • Monopolistic Competition: 0 economic profit in the long run

Formulas

  • Profit in Pure Competition

    • Basic formula:

      • Profit = Total Revenue - Total Cost

      • Where,

      • Total Revenue (TR) = P imes Q

      • Total Cost (TC) = ATC imes Q

  • Costs Analysis: If fixed costs change, examine the implications. If FTC > P > ATC, firms might produce at a loss to avoid shutting down.

  • Shutdown Price:

    • Defined as minimum Average Variable Cost (AUC).

    • Total Loss = Total Fixed Cost

Long Run Equilibrium

  • Under long-run equilibrium, supply increases until prices reach equilibrium with ATC = Price.

  • Conditions must be met for sustained operations under market equilibrium.

Review of Shutdown Price

  • Shutdown Price is defined as minimum Average Variable Cost.

  • The firm produces at a loss when ATC > Price.

  • Long-run equilibrium occurs when price equals minimum ATC:

    • Marginal Cost ext{ and the firm's short-run supply curve intersect}

  • Short-run supply curve reflects marginal cost at every point above minimum average variable cost.

  • The intersection highlights firm behavior and strategic output decision-making under varying market structures.