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Market Structures - Essay Example

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A market structure that does not satisfy the assumptions of perfect competition is regarded as the market of imperfect competition. This type of market does not operate under the rules of perfect competition. In this type of…
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Market Structures
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Market Structures

Download file to see previous pages... Monopolistic competition along with oligopoly constitutes the structure of imperfect competition. Firms that are imperfectly competitive offer many products. The products are offered at administered prices. The price changes are costly and slower. The prime prediction of the theory of monopolistic competition is that firms will produce at the level where marginal cost equals marginal revenue in the short run. However in the long run, the firms will operate at zero profit levels and the demand curve will be tangential to the average total cost curve.
The figure shows the marginal cost curve for the monopolist (MCsm) for the short run. MCsm is the summation of the short run supply curves (SRSc) in the competitive market. The loss of producers’ surplus (area B) and consumers’ surplus (area B) arises from the profit maximizing decision of the monopolist. A monopolistically competitive firm can operate above the level of normal profit.
The above figure represents the economic loss for a monopolistically competitive firm. For a monopolistically competitive firm economic profits are zero and at equilibrium average total cost equals price. Both the firms in monopolistic competition and perfect competition are able to zero profits in the long run. It is possible for a firm operating in the monopoly market to acquire economic profits in the long run.
The price is greater than the minimum point of Average total cost curve in the long run but in perfect competition price equals minimum of average total cost. In perfect competition price is lower and output is higher than monopolistic competition.
A form of market where the industry is dominated by small number of sellers is called oligopoly. Each oligopolist is aware of the market conditions as few sellers are present in the market. The decision of one firm can influence or are influenced by other firms. The responses of the participants of the market are taken into account in ...Download file to see next pagesRead More
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