CMA Foundation · Fundamentals of Business Economics and Management

Forms of Market: formula sheet

Full chapter guide

Key formulas

Meaning of market: Market = buyers + sellers + contact for one commodity → price; Place is not essential. Contact between buyers and sellers is.
Basis of classification: Area | Time | Competition; Area: local, national, international. Time: very short, short, long period. Competition: perfect and imperfect.
Price in the very short period: Supply is fixed → demand decides price; In the long period, price is governed by cost of production along with demand.
Price-taker condition: AR = MR = Price; Holds for a firm in perfect competition. The curve is a horizontal line at the market price.
Profit-maximising (equilibrium) condition: MC = MR, with MC rising (cutting MR from below); Under perfect competition this becomes MC = Price.
Total profit: Profit = (AR − AC) × Q = TR − TC; Positive means super-normal profit, zero means normal profit, negative means loss.
Short-run shutdown rule: Continue if Price ≥ AVC; shut down if Price < AVC; In the short run the firm must still pay fixed cost, so it only needs to cover variable cost.
Long-run equilibrium: Price = AR = MR = MC = minimum AC; Only normal profit. The firm produces at the lowest point of its long-run AC curve.
Profit-maximising condition: MR = MC, with MC cutting MR from below; Gives the equilibrium output. Read price from the AR (demand) curve, not from MR or MC.
Monopoly price relation: Price (AR) > MR, and at equilibrium Price > MC; Shows monopolist charges above marginal cost. In perfect competition P = MR = MC.
Marginal revenue: MR = TR(n) − TR(n−1), or MR = ΔTR ÷ ΔQ; MR falls faster than AR because a price cut applies to all units.
Linear demand and MR: If AR = a − bQ, then MR = a − 2bQ; Valid only for straight-line demand. MR cuts the quantity axis at half the AR intercept.
Total profit: Profit = (AR − AC) × Q = TR − TC; Use AC at the equilibrium output.
Price discrimination in third degree: Allocate output so that MR₁ = MR₂ = MC; The market with less elastic demand gets the higher price.
Price discrimination conditions: Separable markets + no resale + different elasticities; All three are needed for it to be profitable.
Profit-maximising condition: MR = MC, with MC cutting MR from below; Applies in both short run and long run. Read price from the AR (demand) curve at this output.
Long-run equilibrium: P = AR = LAC (tangency), so profit is normal; Also MR = MC at the same output. The AR curve touches LAC on its falling part.
Price and marginal cost: P > MC in equilibrium; Because the demand curve slopes down, MR lies below AR. In perfect competition P = MC.
Excess capacity: Excess capacity = output at minimum LAC − actual equilibrium output; Arises because the tangency lies on the downward-sloping part of LAC.
Abnormal profit: (AR − AC) × Output; Positive in the short run if price exceeds average cost; zero in long-run equilibrium.
Kinked demand: above the kink: Price rise → rivals do not follow → demand elastic (e > 1); The firm loses sales, so it avoids raising price.
Kinked demand: below the kink: Price cut → rivals follow → demand inelastic (e < 1); The firm gains little, so it avoids cutting price.
Equilibrium on kinked demand: MC = MR, where MR has a vertical (discontinuous) gap at the kinked output; If MC shifts within the gap, price and output stay the same.
Cartel aim: Cartel output chosen where industry MC = industry MR; This is the joint profit-maximising (monopoly-like) outcome, then quotas are shared among members.
Classification: Pure vs differentiated (product); collusive vs non-collusive (behaviour); Do not mix the two bases of classification.
Duopoly: 2 sellers, many buyers; A special case of oligopoly. Firms are interdependent.
Monopsony: 1 buyer, many sellers; Buyer has market power and can pay a lower price.
Bilateral monopoly: 1 seller, 1 buyer; Price is decided by bargaining, not by the market.
Oligopsony: Few buyers, many sellers; Buyer-side counterpart of oligopoly.
Monopoly (for contrast): 1 seller, many buyers; Seller has the market power.

Quick revision

A market is any arrangement where buyers and sellers deal, and it need not be one physical place.
Markets are classified by number of sellers, product type, entry conditions and price control.
Perfect competition has many buyers and sellers, a homogeneous product and free entry and exit.
A perfectly competitive firm is a price taker; the market sets the price.
Monopoly has a single seller, no close substitutes and strong barriers to entry.
A monopolist is a price maker, but it cannot fix both price and quantity at will.
Price discrimination means charging different prices for the same product to different buyers or markets.
Monopolistic competition has many sellers with differentiated products and free entry; advertising and branding are common.
Oligopoly has a few firms whose decisions depend on each other, and the kinked demand curve is linked to price rigidity.
Duopoly means two sellers; monopsony means a single buyer.
Product differentiation separates monopolistic competition from perfect competition.
With no negative marking, never leave a question blank; eliminate and guess.

Common mistakes

Thinking a market must be a physical place Fix: Remember that economics needs only contact between buyers and sellers. Online trade is a market.
Treating all goods as one market Fix: A market is for a specific commodity, such as the wheat market or the steel market.
Drawing a downward-sloping demand curve for the firm. Fix: Remember: the industry curve slopes down; the firm's curve is a horizontal line at the market price.
Saying MR is below AR under perfect competition. Fix: Under perfect competition, price is constant, so every extra unit adds exactly the price. AR = MR.
Taking the price from the MR = MC point instead of the demand curve. Fix: After finding Q, always go up to AR. Price is AR at that Q.
Writing MR = a − bQ for linear demand. Fix: Remember MR = a − 2bQ for a straight-line demand curve.
Saying the firm earns abnormal profit in the long run. Fix: Link entry to profit. Abnormal profit invites new firms until price equals average cost and only normal profit is left.
Treating the demand curve as perfectly elastic. Fix: Product differentiation gives some price control. The demand curve slopes down and is fairly elastic.
Saying that oligopoly firms act independently. Fix: Remember that interdependence is the defining feature. Each firm must consider rivals' reactions.
Reversing elasticity on the kinked demand curve. Fix: Rivals ignore a price rise, so demand above the kink is elastic. Rivals match a price cut, so demand below is inelastic.

Exam tips

Expect direct questions such as 'a market in economics means...'. Choose the option that stresses contact, not place.
Learn one example for each basis: local for perishables, international for gold, very short period for fish or vegetables.
Remember that classification by competition leads into perfect competition, monopoly, monopolistic competition and oligopoly, so questions may link them.
With no negative marking, attempt every question and eliminate the options that tie a market to a fixed place.
Examiners often ask which curve is horizontal for a firm. The answer is the AR = MR curve, which is also the firm's demand curve.
Learn the long-run condition as one chain: P = AR = MR = MC = minimum AC. Many MCQs test one link of it.
In numerical MCQs, first find the output, then profit. Do not skip the AVC check when a loss appears.
Know contrasts with monopoly: price taker versus price maker, AR = MR versus MR < AR, and only normal profit in the long run versus possible super-normal profit.