Comparing Market Structures

This is my last blog for this assignment and I am presenting a brief description of four types of firms in a tabular form as shown below and followed by a brief description of graphs for each type of firm.

	Perfect Competition	Monopoly	Monopolistic Competition	Oligopoly
# Firms	Many	One	Many	A Few
Freedom Of Entry	Easy	Protected, very difficult	Easy	Difficult
Nature of Product	No product differentiation	Unique, no close substitutes	Product Differentiation	Identical or Differentiated
Implications of Demand Curve	Horizontal, firm is a price taker	Downward sloping, very inelastic, price set in elastic region	Downward sloping,  highly elastic in Long Run	Downward sloping, elastic, inelastic and kinked
Average Size of Firm	Many small firms	One large firm	Many Small and Medium firms	A few Large firms
Possible Consumer Demand	Very Elastic	Inelastic	Elastic	Elastic
Profit Making Possibility	Only normal profit	Profit Maximize, Economic Profit	Normal profit	Normal Profit, possible economic profit.
Government Intervention	None	Heavily Regulated or Nationalized	Minimum	Unregulated
Pricing Power	Low, Price taker	Very high, Price setter	Low to medium, Price setter/taker	Medium to high, Price setter
Examples	Agricultural products – corn, wheat, apples.	Electric, Gas utilities, Transit	Restaurants, food retail stores	Cell phone, TV, Automobiles

Now let us look at the graphs for each of the four firms.

Perfect Competition 

In perfect competition demand is constant because no single seller or buyer can affect the market. The sellers and buyers are price takers. Firms make only normal profit under these circumstances. There is zero economic profit and no firm is willing to enter into the market. As there is no economic loss, no firm is willing to exit the market. Maximum efficiency is achieved due to the fact that the price is equal to the marginal cost. The price is set at the lowest point of average cost curve hence the firm is productively efficient.

Monopoly 

In a monopoly, there is no competition and no near substitutes are available. The firm is a price setter and the buyers are price takers. The firm can make an economic profit because the price is set in the elastic region and price is greater than the average cost. The allocative efficiency is not achieved because price is set higher than the marginal cost. The price is not on the lowest point of the average cost curve therefore it is not productively efficient.

Monopolistic Competition 

Below are short and long run graphs for monopolistic competition. In the short run, the monopolistic competitive firms earn economic profit because price is greater than average cost. Whereas in the long run, the firms only earn normal profit because the price equals to the average cost. The allocative efficiency is not met because the price is above the marginal cost. In both cases, it is not productively efficient because the price is not on the lowest point of average cost curve. 

 Oligopoly 

In an oligopoly, there is a formally or an informally agreed price. The market is controlled by a handful of firms. The firms have substantial control over price. There is a kinked point in the demand curve where the demand curves D1 and D2 intersect. The D1 portion of the demand curve is elastic and D2 is inelastic. The price does not change when the marginal cost is between points a and b. The oligopoly is not allocatively efficient because the price is set higher than the marginal cost. We also know that we are not operating at the lowest average cost therefore it is not productively efficient.