Different Types of Market Structures - Term Paper Example

? Market Structure Contents Contents 2 Introduction 3 Situation Analysis 3 Perfect Competition 3 Monopoly 6 Monopolistic Competition 9 Conclusion 10 Suggested Areas of Further Research 10 Name of the Student Name of the Professor Course Number Date Market Structure Introduction In the ancient Robinson Cruise economic system, goods and services were supposed to be exchanged in terms Barter System. Over the time ‘money’ came into existence and was used as the medium of exchange for all the goods and services. With the rise in the commercial activities the concept of ‘market’ came into subsistence. A market is simply a place where the buyers and the sellers come in contact with each other for the exchange of products and services. The prices to be charged for the product are also negotiated in the market. The market structure is the term used to define the features of a market. This essay would provide a epigrammatic description of the general types of market structures in the economy. Situation Analysis This section of the essay would explain the different types of market structures: Perfect Competition This type of market structure is hypothetical in the real world at present. In a perfectly competitive market the number of sellers and buyers in the market are infinite in number. Since the number of sellers and buyers are infinite in number, the sellers and buyers are the ‘price takers’ of the products and the services in the market. Since the sellers cannot set the prices of the products, they try to maximize their business returns through the policy of revenue maximization. The types of the products sold by these sellers are homogeneous in nature. This is the reason for which the seller in this type of a market structure does not adopt the method of advertisement to sell their products. In the long run, all the sellers in this type of market structure enjoy normal profit (total cost = total revenue). There are no restrictions on entry and exit imposed on the sellers in a perfectly competitive market structure. The trading of a cereal like wheat would be done in a perfect competitive market structure. Figure 1 Price Determination in Perfect Competition (Source: McEachern 165) As shown in the above graph, the price of the product (wheat) would be determined a market equilibrium price, where the demand (D) and supply (S) curves of the product would intersect. Figure 2: Firms Demand in Perfect Competition (Source: McEachern 165) Since the product is homogeneous in nature, the price for every unit would be same so the sellers as shown in the above diagram would face a perfectly elastic demand curve (d). Figure 3: Firms Output Determination (Source: McEachern 173) The sellers in this market system would continue produce till the marginal cost curve would be >= the average variable cost curve. Thus the point 1 is the shut down point of the firms. This is a point in which the firm would only incur the fixed cost loss. This the portions of the marginal cost curve that a lie above the average variable cost curve is the supply curve of the perfect competitive sellers. Figure 4: Long Run Equilibrium (Source: McEachern 177) As shown in the above graph, in the long run all the firms would only enjoy normal profit. It would be at e, where the long run average cost curves (LRAC), average total cost curve (ATC), marginal cost curve (MC) and the demand or average revenue curve would intersect. Figure 5: Net Social Welfare Maximization (Source: McEachern 184) As shown in the above graph, the net social welfare is maximized in a perfectly competitive market structure, as it generates the maximum amount of consumer surplus. Monopoly Unlike perfect competition, the monopoly market structure is displays complete imperfect competition. In this type of a market structure there is only one seller and many buyers in the market. The single seller has the power to determine the price of the product of the service, thus a monopoly seller is a ‘price maker’ in the market. The monopoly seller may sell homogeneous or heterogeneous products. Advertisement is an optional mode of marketing for a monopolist seller. A monopolist often acts as a ‘natural monopolist’ in the market. The seller threatens other potential entrants in the industry by adopting several business strategies or methods like limit pricing or economies of scale in production. Figure 6: Natural Monopoly (Source: Hubbard 451) The above graph shows the case of a natural monopolist in a monopoly market structure. The seller enjoying the entire market demand and hence experiences economies of scale in production. Economies of scale helps the seller experience a lower average cost (ATC2>ATC1). Figure 7: Price Discrimination (Source: Tucker 169) As shown in the above diagram, a monopolist seller can discriminate among the buyers in term of product prices. The best example of a monopoly seller would be the service of a skilled tutor. The knowledge and skill of teaching that a good tutor would possess is unique. As shown in the diagram, the seller (tutor) can charge lower from the superior students (T2) and higher from the inferior students (T1). Figure 8: Price Determination (Source: Tucker 171) Since the monopoly seller is a ‘price maker’, the business objective of the seller is profit maximization. The demand and the marginal revenue curve (MR) of a monopoly seller have negative slopes. The above diagram shows the price determination of a monopolist (Pm). A monopoly firm may earn normal profit, supernormal profit or loss in the long run. Figure 9: Loss in the Net Social Welfare (Source: Tucker 183) As the monopoly seller discriminates among the buyers in terms of the selling prices. The net social welfare is reduced in this type of a market system. In the above diagram, the yellow triangle shows the deadweight loss created by the monopolist seller in the market. The monopoly seller grabs a portion of the consumer surplus as business profit. Monopolistic Competition This is a market structure that is a mixture of competitive and monopoly market constitutions. In this market system the numbers of sellers are few in the market and the numbers of buyers in the market are infinite. The few sellers in the market possess the price to determine the prices because they sell differentiated products in the market. This means that though the types of the products produced are same, they are different in terms of qualitative factors like color, smell and size. The firms in this of market structure have cut throat competition among themselves. Thus in orders to lead the market competition, the monopolist sellers invest a lot of money in advertisement costs. Figure 10: Profits and Losses in Business (Source: Boyes and Melvin 223) The monopolistic sellers can incur long run profit, loss or breakeven in business. The cost and revenue curves of the monopolistic sellers are same as monopoly, only the demand (D) and the marginal revenue curves (MR) are steeper in this type of a market structure. Most of the business firms in the modern world are in monopolistic market structure like Coca Cola and Procter & Gamble. Conclusion In the contemporary business world, the markets in the economic systems are of various types in terms of characteristic features. It is true that perfect competition in market is best as it maximizes the social welfare. However there are certain dimensions of market segments that require competition for assuring good quality of products and services. Like the rich pharmaceutical industries would never incur high expenditures on research and development to make new medicines, if their production power was not monopolized in the form of patents (Ross, “The Economic Theory of Agency: The Principal's Problem”). Thus competition is important and the simultaneous participation of government welfare initiatives is also necessary for the purpose of economic growth of a nation. Suggested Areas of Further Research It would be great if the characteristic features of more complex market configurations could be analyzed in the project like the Oligopoly and Duopoly Market Structures. Work Cited Boyes, William J. and Michael Melvin. Microeconomics, 9th ed. Connecticut: Cengage Learning, 2012. Print. Hubbard. Microeconomics. New Jersey: Pearson Education, 2008. Print. McEachern, William A. Economics: A Contemporary Introduction, 10th ed. Connecticut: Cengage Learning, 2012. Print. Ross, Stephen A. “The Economic Theory of Agency: The Principal's Problem.” American Economic Review, 63, pp. 134-139, 1979. Web.22 November 2013. Tucker, Irvin B. Survey of Economics. Connecticut: Cengage Learning, 2010. Print. Read More