{"id":3763,"date":"2018-04-25T12:36:00","date_gmt":"2018-04-25T12:36:00","guid":{"rendered":"http:\/\/34.239.104.200\/?p=3763"},"modified":"2025-11-13T10:08:31","modified_gmt":"2025-11-13T10:08:31","slug":"cfa-perfect-competition-vs-monopoly-vs-oligopoly","status":"publish","type":"post","link":"https:\/\/analystprep.com\/blog\/cfa-perfect-competition-vs-monopoly-vs-oligopoly\/","title":{"rendered":"CFA &#8211; Perfect competition vs Monopoly vs Oligopoly"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/blog\/wp-content\/uploads\/2018\/11\/250px-Monopoly-surpluses.svg_.png\",\n  \"caption\": \"Monopoly\",\n  \"width\": 250,\n  \"height\": 250,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n\n\n<p>In this CFA study guide, we\u2019ll make it easier to differentiate between the 3 major types of industries covered in the CFA Curriculum: perfect competition, monopoly, and oligopoly. Most of the formulas needed to crush the Economics portion of the CFA exam will be explained here.<\/p>\n<p><!--more--><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/analystprep.com\/blog\/cfa-perfect-competition-vs-monopoly-vs-oligopoly\/#Perfect_competition\" >Perfect competition<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/analystprep.com\/blog\/cfa-perfect-competition-vs-monopoly-vs-oligopoly\/#Monopoly\" >Monopoly<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/analystprep.com\/blog\/cfa-perfect-competition-vs-monopoly-vs-oligopoly\/#Oligopoly\" >Oligopoly<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Perfect_competition\"><\/span><strong>Perfect competition<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In a perfectly competitive industry, all firms are price takers and this means they cannot control the market price of their product. Also, all firms have a relatively small market share and the consumer does not prefer one product to another. The formula for a perfect competition market is pretty simple:<\/p>\n<p>$$\\begin{align*}\\text{Price}&amp; = \\text{Marginal revenue} = \\text{Marginal cost} = \\text{Average cost}\\\\<br \/>\n\\text{P} &amp;= \\text{MR} = \\text{MC} = \\text{AC}\\end{align*}$$<\/p>\n<p>A firm should produce additional units as long as its marginal revenue is greater or equal to its marginal cost. In the short-run, the firm should shut down if its losses exceed its fixed costs.<\/p>\n<p>In the long-run, all firms in a perfectly competitive market will make\u00a0<em>Economic profit = 0 (Economic profit = Total revenue &#8211; Total cost = 0)<\/em>. Long-run equilibrium will occur at the output where\u00a0<em>Marginal cost = Average total cost (MC = ATC)<\/em>, which is productive efficiency.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Monopoly\"><\/span><strong>Monopoly<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In a monopoly, there is only one producer. The sources of a monopoly power could be big sunk costs, patents, trade secrets (Coca-Cola), regulations, or simply a natural monopoly due to economies of scales (railways). A monopolistic firm&#8217;s marginal revenue is calculated as\u00a0<em>Marginal revenue = \u0394Total revenue \/ \u0394Quantity.<\/em><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-3795 aligncenter\" src=\"https:\/\/analystprep.com\/blog\/wp-content\/uploads\/2018\/11\/250px-Monopoly-surpluses.svg_.png\" alt=\"250px-Monopoly-surpluses.svg\" width=\"250\" height=\"250\" \/><\/p>\n<p>But, a monopoly wants to maximize profits, not revenues. Therefore, a profit-maximizing monopoly chooses an output level where\u00a0<em>Marginal revenue = Marginal costs (MR = MC)<\/em>. We calculate the monopoly profit with the following formulas:<\/p>\n<p>$$\\begin{align*}\\text{Monopoly profit} &amp;= (\\text{Price} &#8211; \\text{Average total cost}) \\times \\text{Quantity}\\\\<br \/>\n\\text{MP}&amp; = (\\text{Average revenue}\\times \\text{Quantity}) &#8211; (\\text{Average total cost} \\times \\text{Quantity})\\\\<br \/>\n\\text{MP}&amp; = \\text{Total revenue} &#8211; \\text{Total cost}\\end{align*}$$<\/p>\n<p>A monopoly creates a deadweight loss, due to the fact that the monopoly restricts supply below the socially efficient quantity. Another way to see this inefficiency is that the monopoly always chooses a price that is above the marginal cost. The formula to find the deadweight loss is:<\/p>\n<p>$$\\begin{align*}\\text{Deadweight loss}&amp; = 0.5 \\times (\\text{Price} \u2013 \\text{Marginal cost}) \\times (\\text{Quantity provided in a competitive market} &#8211; \\text{Quantity produced by monopoly})\\\\<br \/>\n\\text{DL} &amp;= 0.5 \\times (\\text{P} \u2013 \\text{C}) \\times(\\text{Qc} \u2013 \\text{Qm})\\end{align*}$$<\/p>\n<p>If you would like to practice questions\u00a0on\u00a0this topic, consider our\u00a0<a href=\"https:\/\/analystprep.com\">CFA Level 1 Question Bank<\/a>.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Oligopoly\"><\/span><strong>Oligopoly<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>An oligopoly is a state of limited competition, in which a market is shared by a small number of producers or sellers. If firms within an oligopolistic industry have cooperation and trust with each other, then they can theoretically maximize industry profits by setting a monopolistic price.<\/p>\n<p>If oligopolies collude successfully, they will set price and output such that\u00a0<em>Marginal revenue = Marginal cost (MR = MC)<\/em>\u00a0for the industry overall.<\/p>\n<p>You could also simply think of an oligopoly as a hybrid between a perfectly competitive market and a monopolistic market.<\/p>\n<p><blockquote class=\"wp-embedded-content\" data-secret=\"RsADe0Vu3K\"><a href=\"https:\/\/analystprep.com\/shop\/all-3-levels-of-the-cfa-exam-complete-course-by-analystprep\/\">All 3 Levels of the CFA Exam &#8211; Complete Course offered by AnalystPrep<\/a><\/blockquote><iframe loading=\"lazy\" class=\"wp-embedded-content\" sandbox=\"allow-scripts\" security=\"restricted\" style=\"position: absolute; clip: rect(1px, 1px, 1px, 1px);\" title=\"&#8220;All 3 Levels of the CFA Exam &#8211; Complete Course offered by AnalystPrep&#8221; &#8212; AnalystPrep\" src=\"https:\/\/analystprep.com\/shop\/all-3-levels-of-the-cfa-exam-complete-course-by-analystprep\/embed\/#?secret=Xb4V3maaMG#?secret=RsADe0Vu3K\" data-secret=\"RsADe0Vu3K\" width=\"600\" height=\"338\" frameborder=\"0\" marginwidth=\"0\" marginheight=\"0\" scrolling=\"no\"><\/iframe><\/p>\n<p>Photo by\u00a0<a href=\"https:\/\/unsplash.com\/photos\/nXt5HtLmlgE?utm_source=unsplash&amp;utm_medium=referral&amp;utm_content=creditCopyText\">Kyle Glenn<\/a>\u00a0on\u00a0<a href=\"https:\/\/unsplash.com\/search\/photos\/economy?utm_source=unsplash&amp;utm_medium=referral&amp;utm_content=creditCopyText\">Unsplash<\/a><\/p>","protected":false},"excerpt":{"rendered":"<p>In this CFA study guide, we\u2019ll make it easier to differentiate between the 3 major types of industries covered in the CFA Curriculum: perfect competition, monopoly, and oligopoly. Most of the formulas needed to crush the Economics portion of the&#8230;<\/p>\n","protected":false},"author":1,"featured_media":7894,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[70],"tags":[],"class_list":["post-3763","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cfa","blog-post","animate"],"acf":[],"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/posts\/3763","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/comments?post=3763"}],"version-history":[{"count":6,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/posts\/3763\/revisions"}],"predecessor-version":[{"id":13288,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/posts\/3763\/revisions\/13288"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/media\/7894"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/media?parent=3763"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/categories?post=3763"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/blog\/wp-json\/wp\/v2\/tags?post=3763"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}