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Pamala Carlson
S00620646
Microeconomics 2010-005 Term Paper
30 July 2016

Comparing Market Structures

Within the world of Microeconomics there are many types of markets
that businesses are trying to compete in. Within the market structure there
are four methods of competition which are: Perfect Competition, Monopolistic
Competition, Oligopoly, and Pure Monopoly. The two that I would like to
compare and contrast from this structure is a Perfectly Competitive market
and an Oligopoly.
There are many differences between these two markets but there is
one goal that they both share when making any decisions. This can be shown
with the marginal principle which in simple terms means Marginal Cost
equals Marginal Revenue. In a perfectly competitive market there are many
businesses or firms that are participating. Within this market there is an
advantage to come in and out of the market easily. (Miller) There are many
factors that come into play when deciding if a profit is being made or a loss
is occurring.
In an Oligopoly it is different because instead of having many sellers in
the market there are very few. (Miller)There is a take and give that is reliant
on others and how they are making changes prices and other important
factors. There is a high level of interdependence between the sellers in this
market that make it harder to determine how to make a profit and prevent a

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profit loss. Both of these markets have a chance to make a profit however,
they both take different approaches in getting to that goal.
To make a profit there is a certain level of product that needs to be
made to have an optimal output. For both markets the product being
produced is very standardized for the convenience of the consumer to help
them make decisions. When it is standardized there are so many close
substitutes and the product is not differentiated from the many other
products in the market. When deciding how much to produce we can go back
to the marginal principle and making sure that we are producing at the
optimal level of marginal cost equals marginal revenue. When looking at
both markets there are different scenarios and inputs that can be taken into
account when deciding how much product to make.
With perfect competition the amount of product is decided by marginal
revenue. A good example is if we have a factory that is producing a specific
product like baby blankets. They need to decide how much revenue changes
by selling one more unit at a time. (Morgan) In this factory there is an
optimal production of five units. If there is an increase above five by one unit
to equal six units there will be a loss because the marginal cost would be
more than the price and the cost of the product causing the seller to lose
money. The goal is to make the product level where there is still a profit and
the business is not losing money because they are selling over the price to
meet the cost of that one more unit.

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When there is an oligopoly it is hard to decide how much product to

produce because it is based on what price it is set at. The lower the price the
more product is in demand. The seller still has the same goal of making
marginal cost equal marginal revenue. However, because there is a
diminishing rate of return for the marginal revenue the demand can change
as our total change in revenue and total change in output are calculated
together. (Miller) Each markets have similar methods for determining
quantity but the way they determine pricing for each market is different.
We always see prices changing up and down in the market and there
are different ways to determine how they are calculated. In a perfectly
competitive market they are known as price takers. Being a price taker is
when the firm has to take the price that is given rather than change the price
for themselves. There are many reasons why this is taken into effect and the
number one reason is because there are a larger number of buyers and
sellers in the market. (Miller) Another factor that effects this decision is that
because every seller has the same information and they can go in and out of
the market they keep the product price the same for everyone. When looking
at a perfectly competitive market, we can have three firms who are selling
scarfs at the market price of $10.00. If seller one decides to raise his price to
$12.00 then they will lose money because the consumer will buy the
cheapest option available to them. If seller two stays at the same price then
they are taking advantage of all economic profit because they are selling at
market price. However, if seller three sells for a lower price of $8.00 then this

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is what economics calls stupid because they are not selling at the optimal
amount that they could be. (Morgan) If a firm is selling to less than what they
could be then they are not taking advantage of all their opportunity costs
that are available to them.
The opposite thing is happening with an oligopoly. A firm in an
oligopoly has the option to set the prices where they will make the most
profit. With this in mind they have to consider what their competitor is doing.
There is a strong interdependent relationship between firms that they must
see what they are doing before making any decisions. For example if we
have two companies that are selling gas: Freddies Hot Stop and Jorges Gas
Station. (Morgan) They both have gas stations in a very small town across
the street from each other and therefor are interdependent on each other. If
Freddies Hot Stop were to raise their prices then they would end up losing
customers to his rival Jorges Gas Station because they have kept their prices
lower. However, if Freddies Hot Stop were to lower prices than they would
gain more customers because they have the lower prices than their
competitor. (Sweezy) This then gets into game theory and determining what
should happen based on what the competitor is doing. There is not a specific
price and it can always be changing but the firm needs to take what others
are doing around them so they dont lose any profit that they could have
been making.
With determining quantity and price for each market there are many
other factors to consider that go into determining if there is an economic

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profit being made for the optimal processing as economic profit equaling
zero. Some other factors that we would want to consider is what the other
costs are that are being inputted. This can be the average total costs, the
average variable costs, and the average fixed costs. The best way to
determine if the firm is producing at an optimal level is whether their price is
above the average total costs. This can show that they are making more or
at the point that it is costing them to produce. This also means that they are
taking advantage of all opportunity costs that have been calculated into the
cost. There are certain cases where the company is producing a loss because
they are selling at a price that is lower than the cost of production. There are
many ways to determine if they should keep producing. In the short run it is
ok to produce at a loss if it can eventually go back to a profit but if they are
losing in the long-run then the firm should close.
Every business is different but there is one thing that every market
structure has in common and that is the reality principle. Without the
consumer and what they want to buy and how much they want to buy it for
there would be no markets to begin with. Whether there is a perfectly
competitive market and the consumer has an option to buy what they value
the most or with an oligopoly where they will decide the better price to
choose from competitors, there is always that decision that has to be made.
The decision that everyone makes on a daily basis help determine the
economy and whether any type of business will be profitable.

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Bibliography
Miller, Roger Leroy. Economics Today: The Micro View. 17. Pearson, 2014, 2012,
2011. June-August 2016.
Morgan, John Inch. Economics Professor: In Class Lectures June-August 2016.
Saving, C.E.Ferguson and Thomas R. "Long-Run Scale Adjustments of a Perfectly
Competitive Firm and Industry." The American Economic Review December
1969: 774. 30 July 2016.

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Sweezy, Paul M. "Demand Under Conditions of Oligopoly." Journal of Political
Economy August 1939: 568. 31 July 2016.
Thompson, Earl A. "The Perfectly Competitive Production of Collective Goods." The
Review of Economics and Statistics February 1968: 1. 30 July 2016.
Vives, Xavier. Oligopoly Pricing. The MIT Press, 1999. 31 July 2016.