A market with few entry barriers and with many firms that sell differentiated products is

1. Characteristics of the Market Structures
Market structures provide a model with which to compare the characteristics of real markets. Market structure is defined by three characteristics.

• Number of competitors in the market
• Ease of entry of new competitors
• Degree to which competitors products are the same or different

Teaching Strategy: Some instructors also include in market structure whether competitors act independently and consumers and producers knowledge of market conditions.

Teaching Strategy: Consider drawing a circle representing the world on the board and then dividing the world into four types of market structures. Put perfect competition on the South Pole, suggesting there are probably about as many truly perfectly competitive markets as people living there. Then add monopolistic competition in the Southern Hemisphere and oligopoly in the Northern Hemisphere, representing most of the markets in the world. Finally, add monopoly on the North Pole and ask what benevolent monopolist lives there!

1. Perfect competition

   Perfect competition is characterized by many competitors producing a standardized product, with ease of entry.

   Teaching Strategy: The traditional example of perfect competition is an agricultural market at the producer level, but more recently some people have compared personal computers to commodities.

2. Monopoly

   Monopoly is a market with one firm, barriers to entry, and no close substitutes.

   Teaching Strategy: Ask students whether their bookstore is a monopoly. This will usually result in at least one student volunteering that she or he found the textbook over the Internet.

3. Monopolistic competition

   Monopolistic competition is a market characterized by many competitors providing differentiated products, with ease of entry.

4. Oligopoly

   Oligopoly is a market characterized by few firms, barriers to entry, and standardized or differentiated products.

   Teaching Strategy: Pronounce oligopoly for the students. They will be reluctant to ask questions if they do not know how to pronounce the term. Use an example to describe the difference between few and many. Ask students to visualize the cereal aisle of their supermarket. Then ask whether there are many or few competitors.

5. Demand and profit maximization

   Profit maximization, in theory, is achieved at a quantity where MR = MC. For firms in perfectly competitive markets, MR = P, whereas for firms in other market structures, price and marginal revenue are not equal.

   Teaching Strategy: Show students why any other level of output is too little or too much by asking students what a manager should do if MR > MC and MR < MC.

2. Firm Behavior in the Long Run
In the long run, the quantities of all resources used can be changed, including exiting from a market by removing all resources.

1. Normal profit in the long run

   Individual producers respond to changing prices by adjusting output. Under perfect competition, whenever above-normal profits exist, new competitors will enter the market, increasing supply and driving down prices until only normal profits exist.

   Under conditions of monopolistic competition, because there is ease of entry, above-normal profits will disappear in the long run, but because products are differentiated, prices will be higher and quantities lower than in perfect competition.

   Teaching Strategy: Ask students if they went to a school where school uniforms were required. Uniforms are similar to a commodity. Ask what they spent on clothing for school when uniforms were required versus when they went to a school where they were not required. Retail school clothing markets are usually a good example of monopolistic competition, except when uniforms are required.

3. The Benefits of Competition

1. Consumer and producer surplus

   Consumers and producers receive a bonus from the market system. Free entry helps increase the bonus to consumers, which is called consumer surplus.

2. Inefficiency or deadweight loss

   Restricted entry leads to inefficiency or deadweight loss. The greater the barriers to entry, the higher the loss of efficiency.

   Teaching Strategy: Using Figure 6, discuss the impact of free and restricted entry on the consumer and producer surplus.

3. Creating barriers to entry

   In the long run, free entry and exit allow the firm only normal profit. Only if firms create barriers to entry will they receive and maintain positive economic profits over time.

• Product differentiation: Brand names or reputation provide signals to the consumer of a products quality or the quality of the firm producing and selling the product.

Teaching Strategy: Discuss the products of such brand-name producers as Vidal Sassoon, Bayer, McDonalds, Apple, and Nike.

Consumers are willing to pay a higher price for brand-name products than a similar unknown brand; thus, firms expend resources on advertising and marketing to establish a brand name. Such expenditures are called sunk cost expenditures because they cannot be recouped.

Teaching Strategy: Discuss the advertising that appears on TV for automobiles and the amounts spent by the car producers for these ads.

• Unique resources: If all firms have the same resources and capabilities, no strategy for earning economic profit is available to one firm that would not be available to all other firms.

Teaching Strategy: Use the example of Microsoft to show how a unique resource (top scientists hired by Microsoft) may serve as a barrier to entry.

• Firm size and economies of scale

The long run is a productive period in which all resources are variable.

Economies of scale occur if unit costs decrease as output rises when all resources are variable.

Diseconomies of scale occur if unit costs increase as output rises when all resources are variable.

Teaching Strategy: Cite reasons from actual companiesfor example, Ford, AT&T, IBM, Toyotathat these companies would have economies of scale, followed by diseconomies of scale if they continue producing.

• Large firm advantage

Which market has entry barriers?

What is oligopoly market?

Do monopolies sell differentiated products?

What is the meaning of monopolistic market?