Cambridge International AS and A Level Economics: Market structures and barriers (9708) – Revision Notes

Quick recall for outcomes 7.6.1, 7.6.2, 7.6.3 and 7.6.5 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topics 1 to 6 are AS Level content and topics 7 to 11 are A Level content; this unit is A Level only. Full explanations are in the study guide, and the practice set tests it. Check gaps with the free diagnostics, tick the course checklist and use the Cambridge A Level Economics hub. All data below is invented.

Definitions to learn

Term	Definition
Market structure	How a market is organised: number of buyers and sellers, product differentiation, freedom of entry and information
Perfect competition	Many buyers and sellers, identical product, free entry and exit, perfect information; firms are price takers
Imperfect competition	Any structure that departs from perfect competition
Monopoly	One seller (or one dominant seller) with no close substitutes, protected by barriers
Monopolistic competition	Many sellers of differentiated products with fairly free entry
Oligopoly	A few large firms dominate; high barriers; firms are interdependent
Natural monopoly	One firm can supply the whole market at a lower average cost than two or more, because LRAC falls over the whole range of market demand
Barrier to entry	Anything that makes it harder or costlier for a new firm to enter than it was for existing firms
Sunk cost	Spending that cannot be recovered once made
Concentration ratio	The combined market share of the n largest firms, written CRn

The four features at a glance

	Perfect comp.	Monopolistic comp.	Oligopoly	Monopoly
Sellers	Very many	Many	Few, large	One
Product	Identical	Differentiated	Either	No close substitute
Entry	Free	Fairly free	Barriers	Blocked
Information	Perfect	Imperfect	Firms watch rivals	Seller knows more
Price control	None	Some	Considerable	Price maker

Memory aid for describing any structure: number, product, entry, information, price control. Always say which market you are defining before you classify it, because a narrow market looks more concentrated than a broad one.

Natural monopoly: the method

1. Find the fixed cost and the variable cost per unit.
2. Work out average cost for one firm: fixed cost / output + variable cost per unit.
3. Split the output between two firms and repeat.
4. Compare. If two firms give a higher average cost, one firm is the efficient answer.

Reminder: fixed cost 90,000 cu, variable cost 1 cu a unit, market demand 30,000 units.

One firm:  AC = 90,000 / 30,000 + 1 = 3 + 1 = 4 cu
Two firms: AC = 90,000 / 15,000 + 1 = 6 + 1 = 7 cu

Diagram in words: LRAC slopes down across the whole market demand curve. The market is too small for two firms to reach the lowest cost.

Barriers to entry and exit

Type	Mechanism	Keywords
Legal	Rules or rights stop entry	Patent, copyright, licence, exclusive right, regulation
Market	Incumbents’ actions raise the cost of entry	Brand loyalty, advertising, exclusive contracts, predatory or limit pricing
Cost	Entry or competition is expensive	Start-up costs, sunk costs, economies of scale, finance
Physical	Natural or geographic limits	Control of a key resource, scarce site, isolated location

Barriers to exit: sunk costs, redundancy payments, long contracts with penalties, specialised assets. High exit barriers make a market riskier to enter.

Answer pattern: name the barrier type, explain how it stops or slows a new firm, then say what it does to the number of firms.

Number-of-firms check: market size / minimum efficient scale (MES) gives the number of firms that can each reach MES.

Market 90,000 units, MES 30,000: 90,000 / 30,000 = 3 firms
Market 90,000 units, MES 90,000: 1 firm (natural monopoly)

Sunk cost reminder: outlay 200,000 cu, resale value of equipment 60,000 cu. Unrecoverable amount = 200,000 − 60,000 = 140,000 cu, provided nothing else can be recovered.

Concentration ratio: the method

CRn = (sales of the n largest firms / total market sales) x 100

1. Decide n from the question (CR3, CR4 and so on).
2. Choose the same measure for every firm: revenue, units or another.
3. Add the sales of the n largest firms. If shares are given, add the shares.
4. Divide by total sales and multiply by 100. Check that the total includes the smaller firms.
5. State the ratio with n and the unit, for example “CR4 = 75%”.

Worked reminder: shares 30, 20, 15 and 10 (%).

CR2 = 30 + 20 = 50%
CR4 = 30 + 20 + 15 + 10 = 75%
If total sales are 80 million cu: top two sell 50% of 80 = 40 million cu

Working from sales: the top three firms sell 36 million cu in a market of 120 million cu. CR3 = 36 / 120 x 100 = 30%.

Working backwards: if CR3 is 58%, the rest of the market is 100 − 58 = 42%.

Same ratio, different market

Market X has leading shares of 50%, 15%, 10% and 5%. Market Y has four leaders with 20% each. Both have 20% held by other firms.

Market X: CR4 = 50 + 15 + 10 + 5 = 80%    CR1 = 50%
Market Y: CR4 = 20 + 20 + 20 + 20 = 80%   CR1 = 20%

The ratios match, but X has one dominant firm and Y has four close rivals. Use CR1 or the full list of shares to tell them apart.

Evaluation chains

Does a high concentration ratio mean weak competition?

1. A high CR means a few firms hold most sales.
2. With barriers to entry, those firms face little threat from new rivals.
3. They may then set higher prices or offer less choice.
4. But the ratio hides how shares are split, depends on how the market is defined and ignores imports.
5. It says nothing about barriers, so check entry conditions before judging.
6. Judgement: a high CR is a warning sign, and the conclusion depends on the evidence about barriers and behaviour.

How serious is a barrier to entry?

1. Name the type and the mechanism.
2. Ask how large the cost or advantage is compared with the size of the market.
3. Ask how long it lasts: patents expire, brands can be copied and technology changes costs.
4. Ask who gains: patent protection can fund research, but it can also keep prices high.
5. Judgement: the barrier is significant if it is large, lasting and hard to get round.

Must-know distinctions

• Monopoly versus natural monopoly. A monopoly can come from any barrier. A natural monopoly comes from falling long-run average costs over the whole market.
• Monopolistic competition versus oligopoly. Many small firms with differentiated products and easy entry, versus a few large interdependent firms behind barriers.
• Barrier type versus effect. A patent (legal) can also give a cost advantage. Name the type that fits best, and note any overlap.
• Sunk versus fixed cost. Fixed costs do not vary with output. Sunk costs cannot be recovered. A cost can be both.
• High CR versus weak competition. A high CR means few large firms. It does not prove high prices or high barriers.
• CRn versus CRm. A figure only makes sense with n attached.

Quick self-test

1. State two features of perfect competition.
2. Define the four-firm concentration ratio.
3. Shares are 26%, 19%, 14%, 11% and 6%. Calculate CR3 and CR4.
4. Which type of barrier is an exclusive licence to run a ferry route?
5. Define natural monopoly.
6. State two features of monopolistic competition.
7. Which structure is defined by interdependence?
8. The three largest firms sell 36 million cu in a market of 120 million cu. Calculate CR3.
9. A firm spends 200,000 cu on equipment and can resell it for 60,000 cu. How much is sunk?
10. State one limitation of the concentration ratio.

Answers

1. Any two: many buyers and sellers; identical product; free entry and exit; perfect information; price takers.
2. The combined market share of the four largest firms.
3. CR3 = 26 + 19 + 14 = 59%. CR4 = 59 + 11 = 70%.
4. A legal barrier.
5. A market where one firm can supply the whole market at lower average cost than two or more firms, because long-run average cost falls over the whole range of market demand.
6. Any two: many sellers; differentiated products; fairly free entry; some price control; imperfect information.
7. Oligopoly.
8. 36 / 120 x 100 = 30%.
9. 200,000 − 60,000 = 140,000 cu.
10. Any one: it hides how shares are divided among the leading firms; it depends on market definition; it ignores imports; it says nothing about barriers.

Where marks are usually lost

• Describing a structure without naming the market features: number of firms, product, entry and information.
• Listing a barrier without explaining how it stops entry.
• Calling every large firm a monopoly.
• Confusing a natural monopoly with a firm with high costs.
• Adding the wrong firms for CRn, or using revenue for some firms and units for others.
• Dividing by the leaders’ total instead of the whole market.
• Giving a ratio without n, or a share without the percent sign.
• Concluding from a high CR that prices are high, with no further reasoning.
• Treating barriers as permanent and skipping evaluation of how long they last.

Official syllabus

This page follows the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, outcomes 7.6.1 to 7.6.3 and 7.6.5.