1) There are 4 steps to drawing effective market structure diagrams: draw the demand curve, place the average cost and marginal cost curves, identify the profit-maximizing output level where marginal cost equals marginal revenue, and shade the profit or loss regions. 2) The key difference between perfect competition and other market structures is that perfect competition has a perfectly elastic demand curve, while other structures have downward-sloping demand curves with marginal revenue curves below them. 3) Following the 4 steps allows you to draw diagrams that identify the optimal output level and show profits or losses for different market structures.

1. HOW TO DRAW
MARKET STRUCTURE
DIAGRAMS
dineshbakshi.com
4 Easy steps to drawing effective
market structure diagrams

2. PEREFCT
COMPETITION
dineshbakshi.com

3. STEP 1
DRAW THE
Cost/Revenue
DEMAND
CURVE
P
D = MR = AR
Output/Sales

4. STEP 2
MC MC
WHEN AC IS WHEN AC IS
Cost/Revenue
Cost/Revenue
ABOVE THE AR BELOW THE AR
CURVE IT IS A CURVE IT IS A
LOSS AC LOSS
AC
P D = MR = AR P D = MR = AR
Output/Sales Output/Sales
PLACE THE AC & MC CURVE

5. STEP 3
MC MC
Cost/Revenue
Cost/Revenue
AC
AC
P D = MR = AR P D = MR = AR
Q Q
Output/Sales Output/Sales
IDENTIFY THE PROFIT MAXIMISATION LEVEL OF
OUTPUT

6. STEP 4
MC MC
Cost/Revenue
Cost/Revenue
AC
AC
P LOSS D = MR = AR P D = MR = AR
Abnormal Profit
Q Q
Output/Sales Output/Sales
SHADE THE REGION BETWEEN AC CURVE AR CURVE
TO SHOW THE LOSS OR PROFIT

7. MONPOLY
AND
MONOPOLISTIC
COMPETITION
dineshbakshi.com

8. Cost/Revenue
The only difference in drawing
the diagrams for perfect
competition or any other
market structure is the shape P D = MR = AR
of the demand curve(AR)
For perfect competition the Output/Sales
AR=MR is perfectly elastic
Cost/Revenue
whereas for other market
structures the demand curve
(AR] curve is normal i.e. slopes P
downward to the right and the
MR curve is place below the AR D =AR
curve (twice the distance] MR
Output/Sales

9. STEP 1
DRAW THE
Cost/Revenue
DEMAND
CURVE D =AR
MR
Output/Sales

10. WHEN AC IS
ABOVE THE AR
STEP 2
MC
WHEN AC IS MC
CURVE IT IS A BELOW THE
LOSS AR CURVE IT
Cost/Revenue
Cost/Revenue
IS A LOSS
AC
D =AR D =AR
MR MR
Q
Output/Sales Output/Sales
PLACE THE AC & MC CURVE

11. STEP 3
MC MC
Cost/Revenue
Cost/Revenue
AC
D =AR
D =AR
MR MR
Q
Output/Sales Q Output/Sales
IDENTIFY THE PROFIT MAXIMISATION LEVEL OF
OUTPUT MC = MR

12. STEP 4
MC MC
Cost/Revenue
Cost/Revenue
LOSS
AC
Abnormal Profit
D =AR D =AR
MR MR
Q
Output/Sales Q Output/Sales
SHADE THE REGION BETWEEN AC CURVE AR CURVE
TO SHOW THE LOSS OR PROFIT

13. Congratulations !! You
have mastered the art
of drawing market
structure diagrams