What you’ll learn8 learning objectivesChoose one objective for a focused lesson, or study the complete topic.2.11.1(HL)—Market structures• Perfect competition has many firms, free entry, and homogeneous products• Monopoly has a single or dominant firm, high barriers to entry, and no close substitutes• Oligopoly has a few large firms, high barriers to entry, and interdependence• Monopolistic competition has many firms, free entry, and product differentiationSyllabus objective2.11.2(HL)—Rational producer behaviour• Profit maximization occurs where marginal cost equals marginal revenue• Profit equals total revenue minus total costs• Abnormal profit occurs when average revenue exceeds average cost; normal profit when they are equal; losses when average revenue is below average cost• Calculation [HL]: profit, MC, MR, AC, and AR from dataSyllabus objective2.11.3(HL)—Degrees of market power• Market power is the ability of a firm to influence price• Perfectly competitive firms have no market power and are price takers• Imperfectly competitive firms have varying degrees of market power and are price makers• Diagram: perfectly competitive firm as price taker where P = D = AR = MR• Diagram: perfectly competitive firm showing abnormal profit, normal profit, and losses• Diagram: perfectly competitive market equilibrium and allocative efficiency where P = MC or MB = MCSyllabus objective2.11.4(HL)—Monopoly• Monopoly profit maximization can create allocative inefficiency and welfare loss• Monopoly may restrict output and raise price compared with perfect competition• Natural monopoly is a special monopoly case linked to economies of scale• Diagram: market power where AR exceeds MC• Diagram: monopolist showing abnormal profit, normal profit, and losses• Diagram: monopoly versus perfect competition with welfare loss• Diagram: natural monopolySyllabus objective2.11.5(HL)—Oligopoly• Oligopoly can be collusive or non-collusive• Interdependence creates risk of price war, incentive to collude, and incentive to cheat• Oligopoly may create allocative inefficiency• Firms may use price and non-price competition• Market concentration can be measured using concentration ratios• Diagram: collusive oligopoly acting as a monopoly• Diagram: simple game theory payoff matrixSyllabus objective2.11.6(HL)—Monopolistic competition• Monopolistically competitive firms maximize profit in the short run and long run• Many substitutes make demand more elastic than monopoly demand• Monopolistic competition is allocatively inefficient but offers more product variety and less inefficiency than monopoly• Diagram: monopolistically competitive firm showing abnormal profit, normal profit, and losses• Diagram: monopolistic competition with more elastic demand than monopolySyllabus objective2.11.7(HL)—Advantages and risks of market power• Large firms may gain economies of scale, including natural monopoly efficiencies• Abnormal profit may fund research, development, and innovation• Market power risks include lower output, higher prices, and reduced consumer choiceSyllabus objective2.11.8(HL)—Government responses to market power• Governments may use legislation, regulation, government ownership, and fines• Responses target abuse of significant market powerSyllabus objective
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