Perfect competition

Perfect competition has five main characteristics. Firstly, there are many buyers and
sellers in perfect competitive market. Secondly, products of all of the companies in
this type are homogeneous. Thirdly, all consumers and producers have perfect
information of price, quality and production methods of products. Fourthly, there are
no entry and exit barriers so companies can easily enter or leave their business.
Finally, The single firm takes its price from the industry, and is, consequently,
referred to as a price taker. The industry is composed of all firms in the industry and
the market price is where market demand is equal to market supply. Each single firm
must charge this price and cannot diverge from it.
The demand curve of a perfectly competitive firm is perfectly elastic. It means that
changing prices will not significantly affect the demand for the product. When MR <
MC, this means that businesses are loss so they have to cut back production not to go
bust. However, product should be produced quickly and more where MR > MC to
maximize profit. In addition, companies should stop producing as long as MR = MC
because production can not bring profit.

Figure 3: Method makes price and output decisions





Monopoly
Monopoly is contrary to perfect competition. In monopoly market, there is only one
firm and entry barriers are extreme difficulty. Besides, productions are unique,
especial and no close substitute. Therefore, companies are price makers; they will sell
at price where demand is elastic.
Monopoly chooses quantity at MR = MC and use demand curve to determine price
that corresponds to the output. According to the below chart, at profit maximization,
MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q,
supernormal profits are possible (area PABC). (economicsonline)

Figure 4: Method makes price and output decisions








Oligopoly
In oligopoly market, there are few companies but there are many difficult entry
barriers such as scale, patents, access to expensive and complex technology and so on.
Besides, products of oligopoly market can be similar or different. Furthermore,
between companies in this market have mutual interdependence because each firm is
so large that its actions affect market conditions. Oligopolies are popular in the airline
industry, banking, brewing, soft drinks, supermarkets and music. For example, the
manufacture, distribution and publication of music products in the UK, as in the EU
and USA, is highly concentrated, with a 4-firm concentration ratio of around 75%,
and is usually identified as an oligopoly.


Figure 5: Method makes price and output decisions
According to the chart, at profit maximizing equilibrium, P, price is higher than MC,
and output, Q, is less than the productively efficient output, Q1, at point A.