Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Imperfectly competitive markets are those where firms have some control over price (market power).
- Product markets: monopolistic competition (many sellers, differentiated products, low barriers), oligopoly (a few large firms, high barriers), monopoly (one seller, no close substitutes, very high barriers).
- Factor markets: monopsony, a single buyer (for example, one employer hiring most local workers).
- Every firm still aims to maximise profit; the structure changes the outcome.
Key relationships
| Relationship | What it means |
|---|---|
| Price taker: D = MR = P | every unit sells at the market price |
| Downward-sloping demand: MR < P | to sell one more, the price falls on all units |
| MR = new price − (price cut × units sold before) | quantity effect minus price effect |
| Straight-line demand: MR has the same price intercept and twice the slope | MR = 0 halfway to the demand curve’s quantity intercept |
| MR > 0 ⇔ demand elastic; MR < 0 ⇔ demand inelastic | TR is largest where MR = 0 |
| Efficiency needs P = MC | imperfect competitors stop where P > MC, so output is too low |
| Barrier to entry | Example |
|---|---|
| High fixed or start-up costs | steel mill, power grid |
| Legal barriers | patent, copyright, government licence |
| Exclusive ownership of a key resource | the only deposit of a mineral |
Assumptions behind the model
- The firm charges the same price to every buyer (no price discrimination; that comes in Topic 4.3).
- All else is held constant along the demand curve.
Mistakes to avoid
- Writing P = MR for a firm with a downward-sloping demand curve.
- Saying MR is below price because costs rise. It is a revenue idea only.
- Drawing MR on or above the demand curve.
- Confusing P > MC (inefficiency) with P > ATC (profit).
- Mixing up monopoly (one seller) and monopsony (one buyer).
- Forgetting that profit lasts only if barriers to entry block new firms.
Quick self-check
- A firm’s demand is P = 30 − 3Q. What is the MR of the 3rd unit? (TR at 2 = 24 × 2 = 48; TR at 3 = 21 × 3 = 63; MR = 15, below the $21 price.)
- At a firm’s chosen output, P = $40 and MC = $25. Is output efficient? (No. The next unit is worth about $40 to a buyer but costs $25, so output is too low.)
- Name the barrier: a firm holds the only licence to run buses on an island. (Legal barrier.)
Next: practice questions.