Market Structures and Price Determination
Domain 6 covers perfect competition, monopoly, monopolistic competition, and oligopoly, with equilibrium and price determination. The exam tests features, revenue relationships, and the profit-maximising rule.
Core rules and concepts
- Perfect competition: many buyers and sellers, homogeneous product, free entry, perfect information; the firm is a price taker, so P = AR = MR.
- Monopoly: one seller, no close substitute, entry barriers; the firm faces the market demand curve and chooses output where MR = MC.
- Monopolistic competition: many firms, differentiated products, free entry; short-run abnormal profit attracts entry and erodes it.
- Oligopoly: few interdependent firms; price rigidity and strategic behaviour are central.
- General profit-maximising rule: MR = MC and MC cuts MR from below; check shutdown against AVC in the short run.
Worked example
A monopolist faces P = 100 − Q, so TR = 100Q − Q² and MR = 100 − 2Q. With MC = ₹20, set 100 − 2Q = 20, giving Q = 40 and P = ₹60. Profit before fixed cost is (P − MC) × Q = (60 − 20) × 40 = ₹1,600. At Q = 50, MR = 0 and MC = 20, so output should not be expanded that far. A perfectly competitive industry with the same cost would set P = MC = ₹20, showing the monopoly markup.
Traps that cost marks
Do not use P = MC for a monopolist. Do not say a monopoly has a supply curve. Do not treat normal profit as abnormal profit. Do not ignore product differentiation in monopolistic competition. Check the second-order condition.