Market Structures and Cost Curves

Key concepts in economics related to market structures, including cost curves, price, revenue, demand, and how these differ based on the type of market structure.

Market Structure Continuum

• Perfect Competition

  • Characteristics
    • Large number of producers (economists are not specific, but typically over a hundred)
    • Homogeneous product (identical or non-differentiated)
    • Free entry and exit from the industry
    • No market power for individual firms
  • Implications
    • Firms cannot affect market prices
    • Decisions can be made without concern for competitors' reactions
    • Raising prices is ineffective as consumers will buy from competitors

• Monopoly

  • Characteristics
    • Single producer in the market
    • Unique product with no substitutes
    • High barriers to entry (e.g., high costs, legal protections like patents)
  • Implications
    • Complete control over price, limited only by consumer willingness to pay

• Monopolistic Competition

  • Characteristics
    • Many producers making entering the market relatively easy
    • Products are similar but not identical (differentiated)
    • Examples of differentiation: toothbrushes with varying features
  • Market Power
    • Some ability to control price due to product differentiation
    • Consumers may pay more for perceived product benefits

• Oligopoly

  • Characteristics
    • Few large producers dominating the market
    • Products can be identical (e.g., oil) or differentiated (e.g., cars)
    • Some barriers to entry
  • Market Power and Interdependence
    • Each producer has significant market control
    • Producers are mutually interdependent; actions of one affect all
    • Complex decision-making due to mutual interdependence

Exercise

• Think of real-world examples for each type of market structure:
  • Perfectly competitive
  • Monopolistically competitive
  • Oligopolistic
  • Monopolistic
• Be prepared to discuss your examples in the next class.

Next Class

• Discussion will focus on perfect competition in more detail.