Market Structures Overview

Study Notes

Market Structures

Perfect Competition: Many buyers and sellers, homogeneous products, free entry/exit, perfect knowledge, price takers.
Advantages: Efficient resource allocation, low consumer prices.
Disadvantages: Lack of innovation, no product differentiation.
Example: Agricultural markets.
Monopoly: Single seller, no close substitutes, high barriers to entry, price maker.
Sources of Monopoly Power: Legal barriers (patents, copyrights), economies of scale, control over resources.
Effects on the Economy: Higher prices, restricted output, reduced efficiency.
Example: Eskom (South Africa).
Oligopoly: Few large firms, interdependence, barriers to entry, product differentiation.
Types of Collusion: Cartel (e.g., OPEC), tacit collusion.
Advantages: Economies of scale, innovation.
Disadvantages: Collusion leads to higher prices, limited consumer choice.
Example: Automotive industry.
Monopolistic Competition: Many firms, differentiated products, freedom of entry/exit, some price control, non-price competition (like advertising).
Difference from Perfect Competition: Product differentiation and pricing power.
Example: Restaurants, retail clothing stores.

Cost and Revenue Analysis

Costs:
- Fixed Costs: Costs that don't change with output (e.g., rent).
- Variable Costs: Costs that change with output (e.g., raw materials).
- Total Costs: Fixed costs + Variable costs.
- Average Costs: Total cost divided by quantity.
- Marginal Cost: Change in total cost divided by change in quantity.
Revenue:
- Total Revenue (TR): Price × Quantity.
- Average Revenue (AR): TR ÷ Quantity.
- Marginal Revenue (MR): Change in TR ÷ Change in Quantity.
Key Relationships:
- If MR > MC, increase output.
- If MR < MC, reduce output.

Environmental Sustainability and Market Failure

Externalities:
- Positive Externality: Benefits to third parties (e.g., education benefits society).
- Negative Externality: Costs to third parties (e.g., pollution from factories).
Public Goods vs Private Goods:
- Public Goods: Non-excludable, non-rival (e.g., streetlights).
- Private Goods: Excludable, rival (e.g., a car).
Causes of Market Failure: Imperfect competition (like monopolies), externalities, public goods leading to free-rider problems.
Government Intervention: Subsidies (e.g., renewable energy), taxation (e.g., carbon tax), regulation.

Contemporary Economic Issues

Environmental Issues: Climate change (greenhouse gases), pollution, resource overuse.
Strategies: Invest in renewable energy, promote waste management, encourage eco-tourism.

Sample Exam Answers

Market Failure: Inefficient resource allocation, loss of social welfare.
Government Correction of Market Failure: Taxes (e.g., carbon tax), subsidies (e.g., renewable energy).
Monopoly Diagram: Shows a downward-sloping demand curve (AR), MR curve (below AR), cost curves, profit-maximizing output where MR = MC.
Characteristics of Monopolistic Competition: Many sellers, differentiated products, some price control, free market entry.

Exam-Ready Diagram Examples

Perfect Competition: Horizontal demand curve.
Monopoly: Downward-sloping demand curve, shaded profit area.
Negative Externality: Social cost > private cost.

Description

Explore the key concepts of market structures including perfect competition, monopoly, and oligopoly. This quiz will help you understand the advantages and disadvantages of each market type, their effects on the economy, and real-world examples. Dive into the intricacies of collusion and market dynamics.