Market Structures and the Firm
Domain 5 tests the characteristics, pricing and efficiency of the four main market structures, and the profit-maximising rule.
The structures
- Perfect competition: many small firms, identical products, free entry, price takers with a horizontal demand curve; long-run equilibrium gives normal profit only.
- Monopolistic competition: many firms, differentiated products, some price-setting power, free entry.
- Oligopoly: few large firms, interdependence, non-price competition and possible collusion; examples include banking and fuel retailing in Namibia.
- Monopoly: one firm, high barriers to entry, downward-sloping demand; state examples include NamPower and NamWater.
Profit maximisation
All firms maximise profit where marginal revenue equals marginal cost, provided MC is rising. The price is then read off the demand curve.
Worked example
A monopolist faces P = 100 - 2Q, so MR = 100 - 4Q. With constant MC = 20, set 100 - 4Q = 20, giving Q = 20 and P = 60. If ATC at that output is N$40, profit per unit is N$20 and total profit is N$400. A perfectly competitive industry would produce where P = MC, giving a lower price and larger output.
Efficiency and policy
Perfect competition achieves allocative and productive efficiency in the long run; monopoly restricts output and raises price, creating deadweight loss. Government responds with competition law, regulation of natural monopolies and price controls.
Traps that cost marks
- Drawing a downward-sloping demand curve for a perfectly competitive firm.
- Saying a monopolist charges the highest possible price; it maximises profit, not price.
- Claiming oligopolists ignore rivals' reactions.
- Forgetting that normal profit is included in cost curves.