The Market Structures in the Economy - Essay Example

? Exam paper---read the requirement I send you carefully Contents Contents 2 Introduction 3 Response of a perfect market to changes in consumer demand 3 Differences between perfect market and monopoly market 7 Conclusion 9 References 11 Introduction The market structures in the economy vary with the level of competition and concentration. The perfect market is a market which offers the highest competition and the least concentration. The least competition and highest concentration, on the other hand, is present in a monopoly market. The prices of the products and services in a perfectly market is driven by the benchmark prices set by the market. Due to increased competition in a perfect market, the bargaining power of the consumers is very high. The market trends are thus required to be followed by the companies in a market that is perfectly competitive. The price of products and services in a monopoly market is determined by the single player which also takes the government regulations into account. The products in a perfect market could not be differentiated as the products could replace each other. The products in a monopoly market could be differentiated and it is not possible to replace the products in a monopoly market. Response of a perfect market to changes in consumer demand A perfect market is a market that has the highest competition and is less concentrated. This means that the market is driven by a number of competitors which increases the level of competition for delivering products and services to the customers. The changes in the demand and its effects on the changes in price in a perfect market have been explained as follows. In a perfect market, the demand curve is perfectly elastic. This means that any further change in price will result in demand falling to zero (Mankiw, 2011, p.37). Thus a perfect market is represented by a horizontal demand line with the benchmark price remaining constant for the quantity demanded. The demand and price level in a market could not be influenced by the individual firms. The behaviour of the perfect market could also be explained from the graph given below. As the rice increases in a perfect market which represents a condition of perfectly elasticity, the demand fall to zero level and hence, the revenue earned also becomes zero. Such an ideal condition is difficult to obtain under practical conditions. For a change in the consumer demand in a perfect market, the response of the market could be explained in the short term period as well as the long term period. In the short term period, a rise in the demand level of the products against the prevailing supply will increase the price of the products and services. The increase in demand over a short term period is represented by the green line over the dotted line. A rise in price of the products and services over the prevailing cost would provide the companies with economic profits (Hall and Lieberman, 2007, p.108). The rise in the economic profits of the business would be supported by the revenues earned from the market. This is well supported by the economic theory of supply and demand and is explained by the graphical representation given below. “MC” and “ATC” are the marginal cost and the average respectively, “P” is the price which exceeds the cost as a revenue driver. An example of the demand of coffee in a perfect market could be used to explain the market response. A rise in demand of coffee in the market against the prevailing supply would force the coffee firms to raise the prices which would provide them short term economic profits which are, however, not sustainable in the long run as the competition level would tend to bring down the prices very soon. The response of a perfect in the long run with the changes in demand level is explained by the graphical representation given below. With time, the number of firms in the market would increase as there in minimal barrier to entry and also in order to tap the market opportunity. Thus with the increase in supply, the demand line would again move to a position of equilibrium where the marginal costs would be equal to the marginal revenues earned by the market players. This would also restore the price level to the benchmark price as an order of the perfect market competition. The characteristics of the perfect market are thus resembled by the above explanation of the market response with the changes in consumer demand. The market players have very little scope to dictate the price and would have to follow the market trends in the short run as well as in the long run. The changes in the price would occur in the reverse direction due to a fall of demand of the goods and services in the perfect market (Machovec, 2002, p.38). The price level would fall down in the short run. In case, the firms are making losses, they would exit the market in absence of any barriers. The supply level would also fall down and a situation of equilibrium with the changed demand would again raise the prices of the goods and services to the benchmark level in the long run. Differences between perfect market and monopoly market The main points of difference between a perfect market and a monopoly market have been explained as follows. An example of monopoly market would be the business of Monsanto in the commercial seed market of the United States. The major differences lie because of the fact that the perfect market and the monopoly market lies at the two extremes of market structures in terms of market competition and market concentration. The differences are prominent when looked from the point of view of competition of the products and prices of the products. The supply demand curves for a monopoly market have been given in the graphical representation shown below. In a monopoly market, there is least competition and the market concentration is highest among all the market structures. Due to lack of competition in the monopoly market, the companies and the firms are the price setters based on the consumption demand of the product or service. The marginal prices are always set at a level which is higher than the marginal cost. Thus the revenues and the profits are earned in a monopoly market is much more than that of a perfect market. In a perfect market, the marginal revenues are always set at a level equal to that of the marginal cost. The zero product differentiation is an important feature of the perfect market. There are several products available in a perfect market which is homogenous in nature. These products could be used to replace another product in a perfect market. Thus the products could not be differentiated which affects the market price of the products in a perfect market. The products in a monopoly market could be well differentiated and there is no replacement of the monopoly product in such a market. The product competition in a monopoly market is least as the monopoly market is dominated by a single player (Lele, 2006, p.47). As the monopoly market scenario is dominated by a single player, there are more interventions from the government. In a monopoly market, the government enforces strict regulation in order to restore the interests of the public. On the other hand, the product competition in a perfect market is at the peak level. The markets in a perfectly competitive scenario are dominated by several players. Due to the increase in competition among the market players, the level of quality of the products is enhanced with the rise in bargaining power of the consumers. The price of the products is set according to the industry benchmark and the market players are only required to follow the market trends. The companies could not determine the prices of the products at their own discretion. The perfect market shows a perfectly elastic price elasticity of demand. A change in the price level would reduce the level of demand to zero in a perfectly competitive market. On the other hand, a monopoly market would show a negative price elasticity of demand. This means that with the change in prices of goods in the monopoly market, there is little or no effect on the demand level of the goods and services (Marshall, 2006, p.24). There are enormous barriers to entry in a monopolistic market which is dominated by a single player whereas there are no barriers to entry in a perfect market which encourages new players and healthy competition of the market scenario. Conclusion The price level in a perfect market is determined by the benchmark price and is set by the market forces. The perfect market responds to the change in consumer demand in the short run as well as in the long run. In the short run, the perfect market responds to the changes in consumption demand with the temporary increase in prices and earning of abnormal economic profits in the short run. With time, the number of firms in the market increases to match the demand of the market. The competitive scenario would lead to rise of the supply level to match the changed demand and as a result the abnormal profits would be driven away and the price level would again fall down to the benchmark level. As compared to the perfect market, the monopoly market has completely opposite features lying at the other extreme of the market structure. References Mankiw, G. 2011. Principles of Economics. Stamford: Cengage Learning. Marshall, A. 2006. Principles of Economics. Washington: Osprey Learning. Hall, R. E. and Lieberman, M. 2007. Microeconomics: Principles and Applications. USA: Cengage Learning. Lele, M. M. 2006. Monopoly Rules: How to Find, Capture and Control the World's Most Lucrative Markets in Any Business. UK: Kogan Page Publishers. Machovec, F. 2002. Perfect Competition and the Transformation of Economics. USA: Routledge. Read More