AQA GCSE Economics: Market structures, monopoly and oligopoly (8136) – Revision Notes

These revision notes condense sections 3.1.5.1 to 3.1.5.3 of the AQA specification for GCSE Economics (8136), first taught from September 2017. There are no tiers. For full explanations read the study guide, then test yourself with the practice questions. Also see the AQA GCSE Economics hub, the checklist and the free diagnostics. All examples are invented.

3.1.5.1 Identifying market structures

Key idea: there is a range of structures, from many small producers to a single producer.

Factor	Competitive	Non-competitive
Number of producers	Many	One or few
Product differentiation	Little	Often high (branding, design)
Ease of entry	Easy	Hard

Definitions to learn word for word:

• Product differentiation: making a product different from rivals’ so that buyers prefer it.
• Ease of entry: how easily new firms can set up in the market.
• Market share: a firm’s sales as a percentage of total market sales.

Method for a market share question:

1. Add up all shares and check they total 100%.
2. Add the shares of the largest firms asked about.
3. Comment: a high total means a few producers dominate.

Quick reminder: shares of 40, 30, 20, 10 give the top two 40 + 30 = 70%.

3.1.5.2 Competitive markets

Definition: a market where many producers compete for the same customers.

Characteristics:

• many producers, each with a small share
• similar products
• easy entry and exit
• buyers can compare and switch easily
• firms are price takers in practice, with little power over price.

How producers operate: keep costs low, price close to rivals, compete on quality, service and speed, and respond fast to customers.

Impact summary

On	Effect of competition
Price	Lower, and held close to costs
Choice	Wider: many firms and many versions
Consumers	Lower prices, better quality and service, easy switching
Producers	Squeezed profit margins, pressure to cut costs and innovate, weak firms may fail
Workers	More firms hiring means more opportunities; but cost pressure may limit pay or threaten jobs

Why profits are lower than where a few producers dominate

Memorise this four-link chain:

1. Many rivals → firms cannot raise price without losing customers.
2. Prices stay close to costs → small profit per unit.
3. High profit attracts new entrants (entry is easy) → supply rises → price falls.
4. Each firm has a small share → small total profit.

Where a few dominate, entry is blocked, so high profits last.

Worked reminder: margin comparison

A small bakery in a competitive market (invented): price £3.00 per loaf, cost £2.60 per loaf, 500 loaves a week.

• Profit per loaf = 3.00 − 2.60 = £0.40
• Weekly profit = 0.40 × 500 = £200
• Margin = 0.40 ÷ 3.00 × 100 = 13.3%

Two new bakeries open nearby and the price falls to £2.80. Costs and sales stay the same.

• New profit per loaf = 2.80 − 2.60 = £0.20
• New weekly profit = 0.20 × 500 = £100
• Fall in profit = (200 − 100) ÷ 200 × 100 = 50%
• Fall in price = 0.20 ÷ 3.00 × 100 = 6.7%

A 6.7% price fall halves the profit. This is why competition squeezes profits so sharply.

3.1.5.3 Non-competitive markets

Definition: a market where competition is limited because one firm or a few firms dominate.

Characteristics:

• one or a few large producers
• high barriers to entry
• often differentiated or branded products
• firms have power to set prices.

How producers operate: set prices and keep profit high, spend on branding and advertising, may avoid price competition.

Impact on price and choice: higher prices and narrower choice than in a competitive market, because buyers have fewer alternatives.

Monopoly and oligopoly

	Monopoly	Oligopoly
Meaning	A single producer supplies the whole market	A few large sellers hold most of the sales
Key feature	No direct rival, so strong price-setting power	Interdependence: each firm must consider rivals’ reactions
Typical behaviour	Can raise price, limited pressure to improve	Avoids price wars, competes on branding, advertising and features; may collude (usually unlawful)

A firm with a very large share but not 100% has monopolistic power.

Worked reminder: monopoly price change

A sole supplier of ferry crossings to an island (invented) raises a ticket from £8.00 to £10.40.

• Rise = 10.40 − 8.00 = £2.40
• Percentage rise = 2.40 ÷ 8.00 × 100 = 30%

If 5,000 trips a month fall to 4,600:

• Revenue before = 8.00 × 5,000 = £40,000
• Revenue after = 10.40 × 4,600 = £47,840
• Trips fall = 400 ÷ 5,000 × 100 = 8%

Customers with no alternative cut back little, so revenue rises. This shows monopoly power.

Causes of monopolistic and oligopolistic power

Cause	How it creates power
High start-up costs	Few can afford to enter
Economies of scale	Big firms have lower unit costs than newcomers
Patents, copyrights, licences	Legal sole rights
Brand loyalty	Customers will not switch
Control of resources or outlets	Rivals cannot get supplies or reach customers
Mergers and takeovers	Fewer producers
Price cutting to deter entrants	Newcomers cannot survive
Natural growth	Successful firms win share

Consequences

For	Disadvantages	Advantages
Consumers	Higher prices, less choice, poorer service	Lower prices if scale savings are passed on; innovation
Producers	Less pressure to be efficient; small rivals squeezed out	High profit; funds for research
Workers	Fewer employers; possible job losses after mergers	Job security and training in large firms

Worked reminder: economies of scale

A producer of garden furniture (invented) has a unit cost of £9.00 at 2,000 units and £7.20 at 8,000 units. The market price is £8.00.

• Small firm: 8.00 − 9.00 = −£1.00 per unit, a loss of 1.00 × 2,000 = £2,000
• Large firm: 8.00 − 7.20 = £0.80 per unit, 0.80 × 8,000 = £6,400 profit

Only the large firm survives at £8.00, so scale creates dominance and a barrier to small entrants.

Worked reminder: a price war in an oligopoly

Two firms (invented) each charge £50 and each earn £30,000 profit a month. Firm P cuts to £44 to win customers. Firm Q matches the cut.

• Price cut = 6 ÷ 50 × 100 = 12%
• If both now earn £18,000, each has lost 12,000 ÷ 30,000 × 100 = 40% of its profit
• Neither gained customers, because the other copied. Total profit fell from £60,000 to £36,000.

This is why oligopolists tend to avoid cutting prices and compete through branding and advertising instead.

Matching exercise: which structure?

Description	Best fit
One company supplies all the tap water in a region	Monopoly
Fifty market stalls sell similar fruit	Competitive
Four large banks hold most accounts and advertise heavily	Oligopoly
Entry is easy, there are many sellers and products are alike	Competitive

Evaluation toolkit

Say “it depends on” and name the factor:

• how high the barriers to entry are
• whether lower costs are passed on to consumers
• whether the firm fears new rivals
• whether the market is regulated.

Chain template: cause → effect on competition → effect on price or choice → who gains or loses → judgement.

Must-know distinctions

• Monopoly vs oligopoly: one producer vs a few large producers.
• Large firm vs monopoly: size alone does not make a monopoly.
• Price competition vs non-price competition: oligopolists prefer the second.
• Cause vs consequence: barriers to entry are causes; higher prices are consequences.

Quick self-test

1. List the three factors that separate one market structure from another.
2. In a market, four firms have shares of 35%, 30%, 20% and 15%. What share do the top two hold?
3. Define a competitive market.
4. A firm sells 250 units at £40 with a cost of £36 per unit. Calculate its profit and profit margin.
5. Give two reasons why profits are lower in a competitive market.
6. What does oligopoly mean?
7. State two causes of monopoly power.
8. Why do oligopolists often avoid price cuts?
9. Give one possible advantage of a monopoly to consumers.
10. A price rises from £50 to £65. Calculate the percentage rise.

Answers

1. Number of producers, degree of product differentiation, ease of entry.
2. 35 + 30 = 65%.
3. A market in which many producers compete for the same customers, with similar products and easy entry.
4. Revenue = 250 × 40 = £10,000. Cost = 250 × 36 = £9,000. Profit = £1,000. Margin = 1,000 ÷ 10,000 × 100 = 10%.
5. Any two: firms cannot raise prices without losing customers; high profit attracts new entrants and drives price down; each firm has a small share.
6. A market where a few big sellers hold most sales and each reacts to the others.
7. Any two, for example: costly set-up, lower unit costs for big firms, legal protection for one seller, strong brands, owning key supplies, takeovers.
8. Rivals may match the cut, starting a price war that lowers profit for all.
9. Lower prices if economies of scale are passed on, or innovation funded by profit.
10. 15 ÷ 50 × 100 = 30%.

Where marks are usually lost

• Describing a market without using the three factors when asked to distinguish structures.
• Stating “competition is good” with no link to price, choice or profit.
• Treating every large firm as a monopoly.
• Saying monopolies always charge high prices with no reason given.
• Writing advantages or disadvantages for consumers only, forgetting producers and workers.
• Giving a list of causes of market power with no explanation of how each creates power.
• Calculating a percentage change using the new figure as the base rather than the original.
• Leaving out units, such as pounds, or the percentage sign.

Official syllabus

Source: AQA, GCSE Economics (8136) specification, for first teaching from September 2017, sections 3.1.5.1 to 3.1.5.3.