Question

Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures?

Answer 1

Basic Characterstics are as follows:

Pure Competitioni

it ischaracterised with very large number of firms and consumers

standardized products

there is no obstacles to entry of new firms

Price is determined for the entire industry by the forces of demand and supply.  No firm can influence price by a single action.

Pure monopoly:

a market situation in which there is only one seller of a product with barriers to entry of others.

it sells a unique product with no close substitutes it has a control over price ie a price maker

entryof new firms is blocked

Monopolistic competition:

a market situation where there are many firms selling a differentiated product. it has some control over price in a narrow range; firms have an easy entry and exit with also nonprice competition

Oligopoly

: a market situation in which there are a few firms selling homogeneous or differentiated products. there is control over price by mutual interdependence and much collusion

there are many obstacles to entry of firms in the market with nonprice competition, particularly product differentiation.

Equality of MR and MC are essential for profit maximization in all markets because when MC and MR are equal production will not increase or decrease profits.If the last unit produced adds more to costs than to revenue, its production must necessarily reduce profits (or increase losses). On the other hand, profits must increase (or losses decrease) so long as the last unit produced—the marginal unit—is adding more to revenue than to costs. Thus, so long as MR is greater than MC, the production of one more marginal unit must be adding to profits or reducing losses (provided price is not less than minimum AVC). When MC has risen to precise equality with MR, the production of this last (marginal) unit will neither add nor reduce profits.