It occurs when there is: - Poor communication and management in a large firm - Demotivation of workers and thus loss in production - Lack of control over a large manpower spread across locations - Loss of management efficiency when the firm is large and operating in uncompetitive markets - Overpaid resources on higher packages with almost no differentiated product - Product stops being a star product for the firm and becomes a dog instead due to rise in competition, loss of market share and slow market growth. Companies tend to liquidate their assets in such case to stay alive. If a firm has constant input costs owing to factors mentioned above, then decreasing returns to scale simply suggests a rise in long run average cost and diseconomies …show more content…
2. Perfect competition and monopoly are two extremes of market structure. Evaluate the statement by analyzing contrasting features and equilibrium price and quantity determination process under these two types of market. Illustrate your discussion with the help of real world examples. Answer Structure a) What is market structure b) Perfect competition structure vs monopolistic structure: contrasting features c) Equilibrium price and quantity determination in perfect competition d) Equilibrium price and quantity determination in monopoly a) What is market structure Market is a place where sellers and buyers of a product are spread. It’s an area where a product is being sold to a set of buyers at a certain price. A market has a structure which is determined by the nature of competition in the market. Therefore, a market structure is decided by: - Number of sellers - Number of buyers - Their respective nature/type - Nature/type of product - Entry and exit conditions in the market - Economies of scale Perfect competition and Monopoly are two types of market …show more content…
In perfect competition, buyers and sellers are fully aware of the current market price of a product thus none buys or sells at an exorbitant price. Therefore, almost the same rate prevails hypothetically. Because of price discovery, transparency and open information, the market price of a product in a perfect competition is determined by the industry or the laws of demand and supply. - Law of Demand: Demand is the quantity consumers are willing to purchase at a particular price other factors being constant. Generally, demand is more when price is low and vice versa. As shown in the figure below, the demand was OQ at OP price which slips to OQ1 when price increased to OP1. Thus the demand curve is sloping downwards to right under perfect competition. - Law of Supply: It is the quantity a seller is willing to supply at a particular price. Generally, supply of a product is high at a higher price and vice versa. For example, in the figure above, the supply was OQ at OP price. When the price increased from OP to OP1, the supply increased to OQ1 indicating an increase in supply with increase in supply for the profit maximization intention of the
The idea of supply and demand tends to benefit the company when demands are limited. When items are rare and limited companies have a higher ceiling to price products because the consumer is willing to pay more. On websites like Ebay consumers always pay more than retail price showing that the demand is even higher. All sorts of factors such as limited quantities on released dates or limited new products of much wanted products cause the demands. The people are always looking for the next best thing so the demand for it is there even before the product is created and released.
For example, it is extremely important for many firms to be involved in order to prevent and individual firm from profiting only. By having many firms we assure that only a small fraction of the total amount in the market is either sold or bought. Not only is having many buyers and sellers important, providing a standardized product, a commodity, is essential for this market type. A commodity will guarantee that the good or service being sold is roughly the same across all suppliers. Being highly mobile is another characteristic that a perfectly competitive firm must have. The firm needs to be able to relocate if suitable profits are not met. Full disclosure of price and availability is also crucial in a perfectly competitive firm. Buyers and sellers need to be aware of costs of products and services in order to secure that the deal they are obtaining is the best possible. In this type of market the barrier of entry is very low. Basically in order to enter and become a perfectly competitive firm the investor usually only requires sufficient financial capital and a license or permit. Perfectly competitive firms are price-takers. They are care price-taker characterized by accepting the price the market sets on their product or service, and have no control over the change of
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).
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
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
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.
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.
Monopolies have a tendency to be bad for the economy. Granted, there are some that are a necessity of life such as natural and legal monopolies. However, the article I have chosen to review is “America’s Monopolies are Holding Back the Economy (Lynn, 2017)” and the name speaks for itself.
Markets have four different structures which need different "attitudes" from the suppliers in order to enter, compete and effectively gain share in the market. When competing, one can be in a perfect competition, in a monopolistic competition an oligopoly or a monopoly . Each of these structures ensures different situations in regards to competition from a perfect competition where firms compete all being equal in terms of threats and opportunities, in terms of the homogeneity of the products sold, ensuring that every competitor has the same chance to get a share of the market, to the other end of the scale where we have monopolies whereby one company alone dominates the whole market not allowing any other company to enter the market selling the product (or service) at its price.
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.
With supply solely, factors involved with regulation of the supply also control some aspects of demand. Things such as production costs and desired net profit can determine whether a business succeeds or not. Having a balance between quantity and price is the greatest control any business can have. Pricing is obviously one of the most beneficial, or destructive, parts of a business. Pricing is the first and most valuable thing an individual will look at, which will overrule most other judgments based off of quality and detail. Balancing the price, however, helps to create a pristine product, with just the right amount of detail that will fuel the market, while still generating a steady net income.
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
...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)
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).
The first set of conditions for perfect competition applies to the market structure. There are many small buyers and firms (suppliers), where none have an influence over the market price as they are small relative to the market as a whole. This means that each of the suppliers in the industry is a price taker. One firm’s change in output will not affect the total market supply. Products supplied in this market structure are homogenous, meaning that they are perfect substitutes for each other. This is another condition that makes each of the firms a price taker, as any rise in their price would lead to the buyer going to the next perfect substitute. For this condition to apply it further assumes that in the market there is perfect information for buyers so that they are aware of each firm’s price in the industry.