Perfect Competition, Monopoly, Monopolistic Competition & Oligopoly
Market structures — 5–8 marks every attempt. Memorise the feature table, then the price-output diagrams become obvious.
Last reviewed: 25 April 2026
Perfect competition
- •Many buyers + sellers, homogeneous product, free entry/exit, perfect knowledge.
- •Firm is a PRICE TAKER. Industry demand slopes down; firm's demand is horizontal at market price.
- •AR = MR = Price. Firm maximises profit where MR = MC.
- •Long-run: free entry drives profits down to NORMAL profit — P = MC = AC = min ATC.
Monopoly
- •Single seller, no close substitutes, high entry barriers.
- •Firm IS the industry — faces the entire downward-sloping market demand curve.
- •To sell one more unit, monopolist must lower price on ALL units → MR < AR.
- •Profit maximisation: MR = MC; price read off the demand curve above that output.
- •Can earn supernormal profit even in the long run.
Monopolistic competition
- •Many sellers with product DIFFERENTIATION (branding, quality, packaging).
- •Each firm has some pricing power (downward-sloping demand) but low enough entry that long-run profit → zero.
- •Long-run equilibrium: P = AC (tangent to downward-sloping demand), NOT at min ATC — leads to excess capacity.
- •Examples: toothpaste, restaurants, salons.
Oligopoly
- •Few large firms dominate. Interdependence — each firm's pricing affects rivals materially.
- •High entry barriers (scale, capital, brand).
- •Kinked demand curve explains price rigidity: rivals match price cuts but not price rises.
- •Cartels and price leadership common (and often illegal).
- •Examples: Indian telecom, airlines, oil marketing companies.
Formulas
- MR from AR (linear demand)
- If AR = a − bQ, then MR = a − 2bQ
- Monopoly price-output rule
- Set MC = MR, then read price from the demand curve above that Q.
- Lerner index (monopoly power)
- L = (P − MC) / P = 1 / |Ed|
MR has the same intercept but twice the slope.
Higher Lerner index → more monopoly power.
Must know before the exam
- ★AR = P always. MR = AR only in perfect competition.
- ★A firm continues to operate in the short run as long as P ≥ AVC (shut-down point).
- ★Long-run supply curve of a perfectly competitive industry is horizontal at min LAC (constant-cost industry).
- ★Oligopoly is the hardest to predict — 'it depends on what rivals do'.
Common mistakes & fixes
- ✗ Saying a monopoly always charges the highest possible price.
- ✓ Monopoly sets MR = MC, then looks up price on the demand curve. Pricing beyond that REDUCES profit.
- ✗ Treating monopolistic competition and oligopoly as synonyms.
- ✓ Monopolistic = MANY small differentiated firms. Oligopoly = FEW large interdependent firms.
Lock it in with practice
Reading without practising is the #1 reason people forget in the exam. Solve a quick set while this is fresh.