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The Four Market Structures
Perfect Competition
A perfect competition market is a market
containing many firms all selling the same product. The price of the good being sold is determined by the market, and it is
always equal to the marginal revenue of each product. For the firm to stay in business, the price must stay above the minimum
average variable cost. To break even, total revenue from sales has to equal the total cost. To maximize profit, price and
demand must exceed the firm’s average total cost.
Monopolistic Competition
Monopolistic competition is a market that consists of several firms selling differentiated
products for various prices. To maximize profits, the firms produce where their marginal revenue equals their marginal cost.
If demand for the firm’s product is higher than the price and the average total cost, the firm makes a profit. If the
demand or price falls below the average variable cost, the firm will have to shut down.
Oligopoly
An oligopoly is a market with only a few firms which are all interdependent. It is
possible for the individual firms within an oligopoly to collude, but because each firm can cut prices, the collusion is not
always effective. A kinked demand curve is used to display this on the graph.
If, when the firm’s marginal cost is equal to its marginal revenue, demand is
lower than the average variable cost, the firm will have to shut down.
Perfect Monopoly
A perfect monopoly is a market that consists of only one firm that has complete control
over the price of their product. It uses barriers of entry to keep other firms from entering the market. To maximize profit,
demand must be higher than the average total cost where MC=MR. If demand for the firm’s product falls below the total
and average variable costs, it has to shut down.
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