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Compare and contrast the four market structures
Compare and contrast the four market structures
Compare and contrast the four market structures
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There is a range of different market structures that exist in an economic system. The main characteristics of each market vary depending on the industry and the companies related to that industry. Under a mixed economy, it is important for a business to understand what sort of market structure it operates in, as customers are able to choose among a wide range of products, directly affecting price, demand and supply levels. The main different types of market are known as perfect competition, monopolistic competition, oligopoly and monopoly.
PERFECT COMPETITION:
This is a very important market structure, where there are a large number of firms, all of them fairly small compared to the size of the total market and it’s easy for new firms to join or leave the industry as the barriers are low. The perfect competition is a market where all firms produce a homogeneous product, in other words, the products are identical, and there is no advantage for existing firms, as every producer competes on equal terms. In the assumption of perfect competition, there are lots of buyers and sellers, an ample market knowledge and prices are determinate by supply and demand.
Although it’s an unrealistic market structure, the closest example of perfect competition is the agricultural scenario. The price is set by the interaction of supply and demand, which is one of the implications of this kind of market. Firms in the perfect competition are said to be price takers, meaning that they must accept the price the market gives and make a decision about how much outputs to produce. However, in some societies we might find agriculture a poor example of perfect competition, as firms are getting bigger and bigger and agriculture business dominates the market, e...
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...for £2,40 cash single fare, and decided to supply one more unit. Therefore, the new supply number is 701; however the downward-sloping market demand curve suggests that the new price will be lower than before. In other words, TFL cannot distinguish its price, having to supply 701 buses for the same £2,40 cash single fares. On the other hand, TFL will gain more revenue from this additional bus, as more people will be able to use public transport instead of their car or bicycle. The marginal revenue that the monopolist receives from supplying 1 additional unit is equal to the price that it receives for this unit minus its loss in revenue from having to sell N units of output at a lower market price. Thus, the price the monopolist receives from selling N + 1 units exceeds the marginal revenue that it receives from supplying the additional unit of output. (CliffsNotes)
This organization belongs to the oligopoly market structure. The oligopoly market structure involves a few sellers of a standardized or differentiated product, a homogenous oligopoly or a differentiated oligopoly (McConnell, 2004, p. 467). In an oligopolistic market each firm is affected by the decisions of the other firms in the industry in determining their price and output (McConnell, 2005, P.413). Another factor of an oligopolistic market is the conditions of entry. In an oligopoly, there are significant barriers to entry into the market. These barriers exist because in these industries, three or four firms may have sufficient sales to achieve economies of scale, making the smaller firms would not be able to survive against the larger companies that control the industry (McConnell, 2005, p.
Market structure is classified according to the degree of competition firms encounter in their industry (Baker College, 2016). There are four main market structures: pure competition, monopolistic competition, oligopoly and a pure monopoly. Pure competition is where fir...
The Postal Service Monopoly In the United States economy most markets can be classified into four different markets structures. But, each and every market in the United States is completely unique from the others. Generally the best type of market structure for the general public is per- fect competition because it creates the lowest possible price for the public.
An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies. Although firms in oligopolies have competitors, they do not face so much competition that they are price takers (as in perfect competition). Hence, they retain substantial control over the price they charge for their goods (characteristic of monopolies).
No single firm can influence market price in a competitive industry; therefore a firm’s demand curve is perfectly elastic and price equals marginal revenue. Short-run profit maximization by a competitive firm can be analyzed by comparing total revenue and total cost or applying marginal analysis. A firm maximizes its short-run profit by producing that output at which total revenue exceeds total cost by the greatest amount.
There are four major market structures; perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition is the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry (Amacher & Pate, 2013). A perfect competition is characterized by the fact that homogeneous products are being created. With this being the case consumers have no tendency to buy one product over the other, because they are all the same. Perfect competitions are also set up so that there is companies are free to enter and leave a market as they choose. They are allowed to do with without any type of restriction, from either the government or the other companies. This structure is purely theoretical, and represents and extreme end of the market structure. The opposite end of the market structure from perfect competition is monopoly.
For a monopoly to maximise profits it must have an equilibrium point where marginal cost equals marginal revenue, there is no reason for a firm to move from this equilibrium point because they are fulfilling their market plan. Using Figure 1 (Stewart, 2005) it can be explained why a monopoly firm would advertise. Marginal cost is fixed and is the line MC and demand is line D, marginal revenue is line MR. As the firm wishes to profit maximise it sets output at level Qm where marginal revenue crosses marginal cost, this means price is set at Pm where the quantity reaches the demand curve. If a firm is going to advertise it is likely that it will cause demand to shift to the right, this is because more people are going to buy the product when it is being sold at the same price.
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
The Perceived Demand Curve for a Perfect Competitor and Monopolist (Principle of Microeconomics, 2016). A perfectly competitive firm (a) has multiple firms competing against it, making the same product. Therefore the market sets the equilibrium price and the firm must accept it. The firm can produce as many products as it can afford to at the equilibrium price. However, a monopolist firm (b) can either cut or raise production to influence the price of their products or service. Therefore, giving it the ability to make substantial products at the cost of the consumers. However, not all monopolies are bad and some are even supported by the
In conclusion, market structure is important because it leads to strategic decision making. Having a working knowledge of market structure impacts decision making because organizations will learn the characteristics of their competition and how the market will response to changes. This report discussed the four different types of market structures: monopoly, oligopoly, monopolistic competition, and pure competition. It went into detail about what each market structure was and gave every day examples of them. Additionally, it will outlined the type of market structure AutoEdge fits into, how that market structure impacts the level of competition, elasticity of demand, price, and position in the industry.
Perfect competition, also known as, pure competition is defined as the situation prevailing in a market were buyers and sellers are so numerous and well informed that all elements of monopoly
At prices higher than the equilibrium price the quantity supplied will be greater than the quantity demanded and the excess supply would oblige sellers to lower their prices in order to dispose of their output. For example, if price is 40p supply would exceed demand by 110. This situation, illustrated in Figure 11.2, where supply exceeds demand and there is downward pressure on price is sometimes described as a buyers’ market.
In a perfectly competitive market, the goods are perfect substitutes. There are a large number of buyers and sellers, and each seller has a relatively small market share. Perfect competition has no barriers to information regarding prices and goods, meaning there is no risk-taking behaviour – sellers and buyers are rational. There is also a lack of barriers for entry and exit.
However, in the market economy, national and state governments play a slight role. The assumption of the market plays a major role in deciding the right path for a country’s economic development. Mixed economy combines elements of both the command and market economies in one interrelated system. Certain features from both market and command economic systems are taken to form this type of economy. The market system is clearly the most effective economic system.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).