Cambridge IGCSE Economics 0455
Syllabus points
- Explain the meaning of competitive markets and monopoly.
- Explain how market structure affects price, choice and efficiency.
What is market structure?
Market structure describes the degree of competition in a market — mainly how many firms there are and how much power each has over price. The two ends of the range are competitive markets and monopoly.
Key definitions
| Term | Definition |
|---|---|
| Competitive market | A market with many firms competing, so no single firm controls the price. |
| Monopoly | A market dominated by a single (or one very large) firm. |
| Barrier to entry | An obstacle that makes it hard for new firms to enter a market. |
Competitive markets
In a competitive market there are many firms selling similar products. Features and effects:
- No single firm can set the price — each is a "price taker".
- Firms compete on price, quality and service.
- Consumers gain lower prices and more choice.
- Firms must be efficient to survive, keeping costs down.
Monopoly
A monopoly is a single dominant firm, protected by barriers to entry (high start-up costs, control of resources, patents, brand loyalty). Effects:
- The firm is a "price maker" and can charge higher prices.
- Output may be restricted and choice reduced.
- But a large monopoly may gain economies of scale and fund research and innovation.
More competition → lower prices, more choice, greater efficiency. Monopoly → higher prices and less choice, but possible economies of scale.
Worker and consumer effects
Competition tends to benefit consumers (lower prices) but squeezes firms' profit margins. Monopoly benefits the firm (higher profit) but can harm consumers unless the government regulates it.
Worked example
A town has one water company (a monopoly) because laying pipes twice would be wasteful. With no competitors, it could charge high prices and give poor service. A government regulator may cap its prices to protect consumers, while allowing enough profit for the firm to maintain the network — balancing the pros and cons of monopoly.
Common exam mistakes
- Saying monopolies are always bad — note economies of scale and innovation.
- Forgetting barriers to entry as the reason monopolies survive.
Exam technique
Compare competitive markets and monopoly on price, choice and efficiency, then evaluate whether the government should intervene.
Quick revision
- Competition: many firms, lower prices, more choice, efficient.
- Monopoly: one dominant firm, barriers to entry, higher prices but possible scale economies.