Question

How can you tell what kind of market structure something is by only looking at a graph that shows demand, marginal revenue (in the short and logn run) and marginal cost and average cost? What do you look for to determine the type of market structure that it is?

Answer 1

To Determine the type of the market we look at the position of the Demand Curve, Marginal Revenue Curve, Marginal Cost curve and Average Cost Curve both in the long run and short run.

For a Perfect Competition Market, the demad curve is always equal to or coincides with the Marginal Revenue curve of a perfectly competitive firm and is also parallel to OX-Axis (is a horizontal straight line). Also in the long run in the case of perfectly competitve firm the condition of equilibrium is that,

Long Run Marginal Cost =Long Run Averae Cost = Price

and that the firm should produce the level of output at the minimum level of Long Run Average Cost curve. Also at the equilibrium the short run marginal cost is equal to the long run marginal cost and short run average cost is equal to the long run average cost.

Whereas in case of a Monopoly, the Demand curve of the firm always lies above the Marginal Revenue curve and both the curves are downwards sloping. Unlike Perfect Competition it is not necessary for a monopolist to produce at minimum point of Long Run Average Cost Curve. A monopolist can also produce the quantity at the falling part of LAC curve or surpass the minimum point of LAC and produce beyond that depending on the market conditions.

In the case of a monopolistic competition although the demand curve is downward sloping but at the same it is highly elastic which is not the case in Monopoly.

Hence in different types os market we look at the shape of the various curves which helps us in determining the kind of market that curve belongs to. For example a graph having a kinked demand curve belongs to an oligopoly.