Key Concepts of Market Structures to Know for AP Microeconomics

Market structures shape how businesses operate and compete. Understanding these structures—like perfect competition, monopoly, and oligopoly—helps explain pricing, profits, and consumer choices in the economy. Each structure has unique characteristics that impact market dynamics and efficiency.

1. Perfect Competition

   • Many buyers and sellers in the market, none of which can influence the market price.
   • Homogeneous products, meaning goods are identical and interchangeable.
   • Free entry and exit from the market, ensuring no long-term economic profits.
   • Perfect information available to all participants, leading to informed decision-making.
   • Firms are price takers, meaning they accept the market price as given.

2. Monopoly

   • A single seller dominates the market, controlling the entire supply of a product or service.
   • Unique product with no close substitutes, giving the monopolist significant pricing power.
   • High barriers to entry prevent other firms from entering the market.
   • Monopolists can earn long-term economic profits due to lack of competition.
   • Price maker, meaning the monopolist can set the price above marginal cost.

3. Monopolistic Competition

   • Many firms compete, but each offers a slightly differentiated product.
   • Firms have some degree of market power, allowing them to set prices above marginal cost.
   • Relatively easy entry and exit from the market, leading to normal profits in the long run.
   • Non-price competition is common, with firms using advertising and branding to attract customers.
   • Inefficiencies may arise due to excess capacity and not producing at minimum average cost.

4. Oligopoly

   • A few large firms dominate the market, leading to interdependent decision-making.
   • Products may be homogeneous or differentiated, depending on the industry.
   • High barriers to entry exist, which can include economies of scale and brand loyalty.
   • Firms may engage in collusion to set prices or output levels, leading to higher profits.
   • Price rigidity is common, as firms are reluctant to change prices due to potential price wars.

5. Duopoly

   • A specific type of oligopoly with only two firms competing in the market.
   • Each firm’s decisions directly affect the other, leading to strategic behavior.
   • Can lead to collusion or competitive behavior, depending on the firms' strategies.
   • Price and output decisions are interdependent, often modeled using game theory.
   • May result in higher prices and lower output compared to perfect competition.

6. Natural Monopoly

   • Occurs when a single firm can supply the entire market at a lower cost than multiple firms.
   • High fixed costs and low marginal costs create a situation where one firm can dominate.
   • Often regulated by the government to prevent price gouging and ensure fair access.
   • Examples include utilities like water and electricity, where infrastructure costs are significant.
   • Can lead to inefficiencies if not properly regulated, as monopolists may restrict output.

7. Monopsony

   • A market structure with a single buyer and many sellers, giving the buyer significant power.
   • The monopsonist can influence prices paid to sellers, often driving them down.
   • Common in labor markets where one employer dominates employment opportunities.
   • Can lead to lower wages and reduced supply of goods or services.
   • May result in inefficiencies and welfare losses similar to those seen in monopolies.