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What are the Key Differences between Types of Markets?
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Do curso por Erasmus University Rotterdam
Introduction to Economic Theories
26 ratings
Na lição
Micro Economics: Firms and Markets
Conheça os instrutores
Irene van StaverenProf. dr.
International Institute of Social Studies (ISS)
Rob van TulderProf. dr.
Department of Business-Society Management, Rotterdam School of Management
Maria DafnomiliPhD researcher
International Institute of Social Studies
Welcome to the tutorial on the key differences between
different types of markets and diagrams.
This tutorial helps you to see and
understand the key differences between the different market types.
This is very relevant because we all buy and sell and invest and
work in a wide variety of markets.
In some markets, buyers are better off than in other markets.
But in other markets, sellers are better off than in other markets.
Remember the five market types, full competition,
monopoly, oligopoly, monopsony, and monopolistic competition.
In the video I've explained each type without any illustration.
In the course book, I've made diagrams for each market type.
For those of you who are curious about the logic of the diagrams,
I will explain them in this tutorial.
I will start with the ideal type of market, full competition.
This is defined as a market with many sellers and many buyers.
A firm in a competitive market faces strong competition and
cannot influence the market price.
When a firm increases the price,
all customers will run away to the competitors.
But when the firm reduces the price, and still makes a profit,
all the others will follow, so they will not lose their customers.
That's very nice for us as consumers.
Through competitive pressure, we get low prices.
And when the firm lowers the price too much, it will go bankrupt.
And the rest will keep the old price and will survive.
So in a fully competitive market, firms face a more or
less fixed price and demand for the product.
Now the diagram looks as follows.
In a space of market diagram for consumer goods,
there is always vertical axis price, P, and the quantity on the horizontal axis.
So the demand function is horizontal at a market price,
Pe for equilibrium.
So this is the demand function.
And it's exactly the same as the marginal revenue function, MR.
The supply function represents marginal cost, MC, and it moves upward for
increasing quantities sold, M C.
Market equilibrium is at the intersection of MR and MC.
Remember from the previous tutorial on profit and neoclassical economics?
That's the point where each firm maximizes profit.
This is at quantity Qe and price Pe.
Now we move to the monopoly.
A monopoly market is only one seller and many buyers.
The diagram for
a monopoly looks a bit different because a monopolist can determine a price himself.
And that is why we see a downward sloping marginal revenue curve,
MR.
We also see a downward sloping demand curve, as is common for normal goods.
So this is the demand curve,
it's the same as average avenue, AR.
The revenue per unit sold.
In a monopoly, we find the equilibrium by first finding the intersection between
MR and MC as in a competitive market.
And, again, MC is upward sloping.
This is the equilibrium quantity Qe.
But the price is not at that intersection.
It's higher.
Monopolies ask a high markup over the market price.
We find it where the vertical line from Qe hits the demand function.
[SOUND] At this point,
this is the price, P e.
So the market equilibrium in a monopoly is this price equilibrium,
Qe, and it is not at this level.
Here is the equilibrium.
So that was a monopoly market, now we move to an oligopoly.
An oligopoly market is just a few sellers and many buyers.
The diagram for an oligopoly looks a bit
weird because of the kinked demand function, D.
The kinked demand function equals average revenue AR,
and a discontinuous curve for MR.
So here we go for
the kinked
demand function, which is same as average revenue.
And we have a kinked marginal revenue function.
Again, we have as before in the other markets an upward sloping marginal
cost function.
The equilibrium quantity is where MR equals MC, as in a competitive market.
But the equilibrium price is higher.
It is where the vertical line up from Qe hits the demand curve.
So here we have Qe, the price is up to where we hit the demand function.
So this has a discontinuous part.
We don't know exactly where the equilibrium is,
because of the power bargaining between the different oligopolist firms.
So we move to the next market, which is a monopsony market.
Remember it's a market with only one buyer and many sellers.
The surprise here is that when the buyers buy less, they also pay less.
Now, this is contrary to a standard market, a normal market,
where a lower Q implies a higher P and the other way around.
So when in a monopsony market the sellers want to get a higher price,
they will simply sell less.
Let me show you this in the diagram.
The diagram for a monopsony market is normal downward sloping demand curve.
D, and a normal upward sloping MC curve.
Marginal cost.
But what's the supply curve, which is derived from average cost AC?
Market equilibrium is where supply meets demand.
So we have an average cost curve.
Average cost, and that equals S, that's the supply curve.
So where supply meets demand,
here, we have an equilibrium, Q1.
And we have an equilibrium price, P1.
But if the buyers want to pay less, they will also buy less.
This shows that a single seller cannot benefit from a price decrease by
selling more.
A lower quantity sold at Q2 hits the supply curve at P2, at a lower price.
So lower quantity Q2,
unfortunately, also has A lower price, P2.
Now, the final market type I'd like to discuss is monopolistic competition.
Remember this is the market I've defined as many buyers and many sellers, and
a heterogeneous product such as art, or restaurant meals, or managers.
The equilibrium quantity sold, Q1, is where MR,
marginal revenue, equals MC, as in the standard case.
So we have MR1,
we have marginal cost.
We also have average cost, but let's disregard that one for the moment.
And there is D1.
So MC equals MR gives us
an equilibrium quantity, Q1.
The equilibrium price will be at P1 where Q1, when you go up,
hits the demand function.
So it's not here, but it is higher where Q1 moving upwards,
hits the demand Function, that's P1.
More competition from more firms drives the demand function down, and
the MR function also.
So if we now have more competitors in this market, we have a lower MR.
But also a lower demand function,
so MR2 and a demand function 2.
This gets a new equilibrium, with Q2 as
the point where the new marginal revenue hits marginal cost.
So here we have Q2, and the price is again,
not horizontally to the price axis, but
up to the new demand function, and then horizontally.
So we get P2.
So in a new equilibrium, with more competition,
we have lower quantity sold at a lower price.
I hope that this tutorial has given you a clearer understanding of the differences
between the five market types and why they matter.
Would you like to buy your bread from a monopolist, risking paying too much for
low quality?
Or would you like to be hired by a monopsonist who can
pay you a low wage because he knows that you have no other employment possibility?
I hope that you see that these abstract things as market type
matter in our daily lives.
Now thank you very much for watching this tutorial, and
I look forward to seeing you in the next one.
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