Classifying Types of Markets in Microeconomics

By Peter Antonioni, Manzur Rashid

Part of Microeconomics For Dummies Cheat Sheet, UK Edition

Microeconomists compare different types of market depending on the number of firms in the market, the ease of entering the market and the degree to which products sold are similar. There are four main types are:

  • Perfect Competition: A very large number of firms sell to a very large number of consumers. Firms make an identical product, and consumers are perfectly informed about prices and quantities. An example might be a fruit and veg market.

  • Pure Monopoly: A pure monopoly is the only firm selling in a market, and there may be high entry or exit costs. Monopolies will produce less for a higher cost. Consumers will get worse welfare under monopoly, and society as a whole will take some part of the loss – a deadweight loss.

  • Oligopoly: Oligopolies are markets where there are only a few competitors, and probably high entry costs. Oligopolies will tend to produce more than monopolies but less than forms in perfect competition – the result depends on how firms compete with each other.

  • Monopolistic Competition: In a monopolistically competitive market firms make different products from each other. As a result they behave like monopolies in the short run and competitive firms in the long run. Firms in monopolistic competition have to consistently invest in their product to keep themselves making higher profits.