OxfordAQA International AS and A-level Economics: Competitive market structures (9640) – Revision Notes

These notes condense sections 3.3.3.1 to 3.3.3.3 of the OxfordAQA International AS and A-level Economics specification (9640), version 1.2. Section 3.3 is the extra International A2 content. The explanations and longer worked examples are in the study guide. Then test yourself with the practice questions. Course pages: hub, checklist and free 10-minute diagnostics. All figures are invented and illustrative.

Key terms

Term	Meaning
Market structure	Features of a market that shape firm behaviour: seller numbers, product differences, entry conditions
Price taker	A firm with no power over price; it accepts the market price
Normal profit	The minimum profit that keeps the owner in the market; TR = TC including this
Supernormal profit	Profit above normal; AR is above AC
Shutdown point	Price equal to minimum AVC in the short run
Allocative efficiency	P = MC
Productive efficiency	Output at minimum AC
Excess capacity	Output below the minimum-AC output
Non-price competition	Competing through brand, quality, design, advertising, service or location rather than a lower price

Spectrum of market structures (3.3.3.1)

	Perfect competition	Monopolistic competition	Oligopoly	Monopoly
Sellers	Huge number	Large number	A few large	One
Product	Identical	Differentiated	Either	Unique
Entry	Free	Easy	Hard	Blocked
Price power	None	Some	Considerable	Greatest

Use the same three tests every time: how many sellers, how different the products are, how easy entry is. Say “closest to”, because real markets are not pure types.

Perfect competition (3.3.3.2)

Characteristics: a large number of buyers and sellers; identical products; free entry and exit; perfect knowledge; price takers.

Firm’s demand: horizontal at the market price, so AR = MR = P.

Method in steps (short run)

1. Draw the price line, MC (rising) and AC.
2. Find output where MC = P.
3. Read AC at that output.
4. Compare: P above AC means supernormal profit; P equal to AC means normal profit; P below AC means a loss.
5. If there is a loss, compare P with AVC. P at least AVC: stay open. P below AVC: shut down.
6. Long run: supernormal profit brings entry, supply shifts right, price falls to minimum AC. Losses bring exit and a rise in price.

Worked reminder (Farm G, invented). Fixed cost is 30. Variable cost for 1 to 6 units is 18, 32, 44, 60, 80 and 108, so MC is 18, 14, 12, 16, 20 and 28, and minimum AVC is 14.67 at 3 units.

Price	Output (MC at most P)	TR	TC	Profit	Decision
22	5	110	110	0	Normal profit; price = AC
17	4	68	90	−22	Stay: 17 is above AVC of 15, and the loss is under the fixed cost of 30
14	3	42	74	−32	Shut: 14 is below minimum AVC; closing loses only 30

Long-run market calculation. Demand is Qd = 800 − 10P, the long-run price is 24 and each firm produces 8. Market quantity = 800 − 240 = 560, so the number of firms is 560 ÷ 8 = 70.

Efficiency proposition: given its assumptions, including no externalities, perfect competition gives P = MC (allocative efficiency) and output at minimum AC in the long run (productive efficiency).

Yardstick: compare real markets with it to see how far price exceeds MC and AC exceeds its minimum. The same applies to labour markets.

Labour market reminder. A wage taker hires while MRP is at least the wage. Wage 120, price 8: a worker adding 16 units has MRP = 16 × 8 = 128, so hire. The next adds 14 units, MRP = 112, so stop.

Assessing the proposition

• Externalities mean P = MC can still misallocate.
• Large minimum efficient scale means many tiny firms cannot reach minimum AC.
• No long-run supernormal profit may limit research and development, and identical products give no variety.
• Perfect knowledge and free entry are rarely met.
• Efficiency says nothing about fairness in the distribution of income.
• Judgement: a useful benchmark, but not a description of real markets.

Monopolistic competition (3.3.3.3)

Characteristics: a large number of firms; differentiated products; low barriers; some price power; downward-sloping, fairly elastic demand; non-price competition.

Method in steps

1. Draw AR (demand) and MR below it, with MC and U-shaped AC.
2. Output is where MR = MC. Read price from AR above that output.
3. Short run: price above AC means supernormal profit.
4. Entry shifts each firm’s demand left and makes it flatter, until AR touches AC (normal profit).
5. Long run: AR is tangent to AC to the left of the AC minimum, so there is excess capacity and price is above MC.

Worked reminder (Shop S, invented). TC = 50 + 3q + 0.02q², so MC = 3 + 0.04q and minimum AC is at q = 50, where AC = 5.

	Short run	Long run
Demand	P = 9 − 0.08q	P = 7 − 0.06q
MR = MC	9 − 0.16q = 3 + 0.04q	7 − 0.12q = 3 + 0.04q
Output	30	25
Price	6.60	5.50
TR and TC	198 and 158	137.5 and 137.5
Profit	40	0

In the long run, AC at 25 = 2 + 3 + 0.5 = 5.50, which equals price. Excess capacity = 50 − 25 = 25, which is half of the minimum-AC output. The mark-up is 5.50 − 4.00 = 1.50.

Elasticity link. Long-run demand is more elastic than short-run demand. At the short-run point, PED = (1 ÷ 0.08) × (6.60 ÷ 30) = −2.75. At the long-run point, PED = (1 ÷ 0.06) × (5.50 ÷ 25) = −3.67.

Non-price competition

• Strengthens monopoly power: brand loyalty, less elastic demand, higher barriers to entry.
• Can also make markets more competitive: variety, quality and information for buyers.
• Costs matter: advertising adds to fixed cost, and if rivals copy it the benefit can vanish.

Worked reminder. Shop S spends 20 on advertising, so TC = 70 + 3q + 0.02q². Demand shifts to P = 7.8 − 0.06q, so MR = 7.8 − 0.12q.

• MR = MC: 7.8 − 0.12q = 3 + 0.04q, so q = 30 and price = 6.00.
• TR = 180, TC = 70 + 90 + 18 = 178, profit = 2. Without advertising, profit was zero.
• If rivals copy and demand returns to P = 7 − 0.06q, output is 25 and price 5.50. TR = 137.5 but TC = 70 + 75 + 12.5 = 157.5, a loss of 20.

Diagram checklist

• Label both axes: price or cost on the vertical axis, output on the horizontal axis.
• Perfect competition: horizontal AR = MR, rising MC, U-shaped AC, with MC cutting AC at its lowest point.
• Monopolistic competition: downward-sloping AR, MR below it, and MR = MC fixing output.
• Mark the profit-maximising output, the price, and the AC at that output.
• Shade supernormal profit or loss as a rectangle between price and AC.
• Show the long-run position as a second diagram, or a shifted curve with an arrow, and state why the curve moved.

Must-know distinctions

Idea	Be clear that
Perfect competition and monopolistic competition	Both have normal profit in the long run, but only perfect competition reaches P = MC and minimum AC
Price taker and price maker	A price taker faces horizontal demand; a monopolistically competitive firm faces a sloping curve
Shutdown and loss-making	A loss does not mean closure; compare price with AVC
Normal and supernormal profit	Normal profit is part of costs
Efficiency in theory and in practice	Efficiency depends on the assumptions

Quick self-test

1. A perfectly competitive firm sells 80 units at 12. State its MR and TR.
2. Name the three features that separate market structures.
3. A perfectly competitive market has long-run price 24. Demand is Qd = 800 − 10P and each firm makes 8 units. How many firms are there?
4. Farm G (above) faces a price of 14. Should it produce? Give the loss each way.
5. Why does supernormal profit disappear in the long run in monopolistic competition?
6. Shop S has long-run price 5.50 and MC of 4.00. Is it allocatively efficient?
7. Calculate Shop S’s excess capacity as a percentage of the minimum-AC output.
8. Give one way non-price competition strengthens a firm’s market power and one way it benefits consumers.
9. State one assumption of perfect competition that, if it fails, weakens the efficiency conclusion.
10. Shop S’s short-run price falls from 6.60 to 5.50 in the long run. Calculate the percentage change.

Answers

1. MR = 12 and TR = 80 × 12 = 960.
2. Number of firms, product differentiation, ease of entry.
3. Qd = 800 − 240 = 560; 560 ÷ 8 = 70 firms.
4. No: price is below minimum AVC (14.67). Producing 3 gives 42 − 74 = −32; closing gives −30, so shut down.
5. Entry by rivals shifts each firm’s demand left and makes it more elastic, until AR just touches AC.
6. No, because price is above MC (5.50 against 4.00).
7. (50 − 25) ÷ 50 = 50%.
8. Brand loyalty makes demand less elastic. Better quality or information helps buyers.
9. Examples: no externalities, perfect knowledge, or free entry.
10. (5.50 − 6.60) ÷ 6.60 × 100 = −16.7%.

Where marks are usually lost

• Drawing a sloping demand curve for a perfectly competitive firm.
• Shutting down at any loss, instead of comparing price with AVC.
• Using MR = AR in monopolistic competition; MR lies below AR.
• Missing excess capacity in the long-run monopolistic competition diagram.
• Giving the efficiency proposition without its assumptions.
• Calling normal profit “zero profit” without saying costs include it.
• Working out a percentage change against the new figure rather than the starting one.
• Stating that non-price competition is good for consumers, or bad, without a reason either way.

Official syllabus

Source: the OxfordAQA International AS and A-level Economics specification (9640), version 1.2, sections 3.3.3.1 to 3.3.3.3 and quantitative skills in 3.5.