December 11, 2011

Economic Analysis of Different Competitive Conditions in Markets

Under perfect competition there are many small firms producing an identical product. Also there are numerous buyers buying small quantities.

Under these conditions each producer faces a completely horizontal demand curve. There is a market price at which he can sell his entire produce and he cannot sell any of his items at a higher price.

Under such conditions, a profit maximizing firm will set its production at that level where marginal cost equals market price.

Monopolist come from the Greek words mono for 'one' and polist for 'seller'. Hence monopolist is a single seller of a particular product in a market. Monopoly is a market situation in which there is only one seller.

marginal revenue is the increment in total revenue that comes when output increases by one unit.

The maximum-profit comes to a monopolist at a quantity level where its marginal revenue is equal to its marginal cost.


Where as in perfect competition, the rational decision for a producer is MC = P. P does not change with quantity a single producer is offering in a perfect competition.

In a monopoly only one seller is in the market. Hence as he offers to sell more, marginal revenue comes down as price come down with increase in selling quantity.

Between monopoly and perfect competition lies imperfect competition in the market.

Duopoly is situation where two sellers are in the market.

Oligopoly is a market dominated by few firms.

Oligopolies occur due to legal restrictions like quotas, patents which are to be licensed and product differentation.

Some characterization of Oligopoply

Collusive oligopoly
Dominant firm oligopoly

Monopolistics competition

There are many firms but they sell dissimilar products.


Paul Samuelson and William D. Nordhaus, Economics, 13th Edition, McGraw-Hill, 1989

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