A. Monopoly, perfect, oligopoly, sole trade and monopolistic are examples of market structures.
i. Monopolistic competition faces a downward slopping demand curve.
ii. Monopolistic competition has both features of a monopoly and perfect competition.
The firm in the short run
In the short run it operates as a monopoly of some kind. Its product is quite different from other firms’ products. This enables it to have influence in its own segment of the overall market. Thus, other firms outside the market pose no threat to it. The short run equilibrium position is the same as that of the monopolist as shown in figure 2.1.
Fig. 2.1 Output
The firm is able to make abnormal profits of CPAB. At output Q, profits are maximised where the marginal cost is equal to the marginal revenue. Output Q is the equilibrium output while P is the equilibrium price.
The firm in the long run
In the long run, the firms outside the market will move in because of the supernormal profit they see in the long run. The effect of this on a firm is that the demand for its product will be reduced as some of its customers will move to other brands. Graphically, the demand and marginal revenue curves will shift to the left as shown in figure 2.2 below. The entry of a new firm shifts the demand curve of the existing firm to the left (from D to D1 when compared to figure 2.1). The firm will continue to maximise its profits by putting the new marginal revenue, MR1, equal to marginal cost though the will now be lower.
B. CHARACTERISTICS OF OLIGOPOLY
Oligopoly refers to markets dominated by few large firms. The entire output of the market is produced few firms. An...