Market Structure and Macroeconomic Environment - Literature review Example

Market Structure and Macroeconomic Environment Introduction The study of macroeconomics describes and explains the economic process, which is principally concerned with examining the aggregate behaviors by imposing simplifying assumptions. These assumptions observed from the investigations are often used in order to build efficient macroeconomic models. These models thus framed are used to assume the macroeconomic dynamics that eventually affects the market structure. Macroeconomics is related with the study of the performances of the economy as a whole. It aggregates the real output, inflation and exports as well as imports of a nation over a stipulated time frame. Subsequently, the macroeconomic models aggregate the performance of the governments as well as the market structures in order to develop economies (OUM, 2013; Tulane University, 2011). It would be vital to mention that owing to the diversity of the market structures defined under the economist group, macroeconomic fluctuations can be witnessed affecting the economies of varied nations throughout the globe by a considerable degree (McConnell, Brue & Flynn, 2009; Hall, 1986). With this concern, the essay intends to analyze different market structures that are prevalent in the economic industries and the behaviors of the same at different market levels. Subsequently, the association prevailing amid the different economic concepts has also been elaborated with special focus on the effects of fluctuations of these economic concepts impose on market structure. Part I Perfect Competition (Pure Competition) Perfect or Pure Competition can be defined as a theoretical concept wherein a huge figure of organizations are involved in producing identical products. Owing to the presence of large figure of suppliers producing homogeneous products, which are regarded as perfect substitutes of each other, individual firms ultimately become price takers. The agricultural markets as well as the wholesale markets of fish, flower, apple and tomatoes among others are the examples of perfect competitive market. This particular market possesses special characteristics of free entry and free exit. There are no barriers for entry in perfect competitive markets (Jaimovich, 2012; McConnell, Brue & Flynn, 2009). The products being homogeneous in nature are the close substitutes of the products of other firms producing similar goods and making it difficult to differentiate among the products of the suppliers (Jaimovich, 2012). It has been apparently observed in a purely competitive market that the individual firms cannot control the price of the market. Owing to the small percentage of goods produced by the firms, these fail to influence the total supply or the price. This lack of effect on the market leaves the suppliers at the clemency of the market and bounds them to accept the price determined by the market as a whole (McConnell, Brue & Flynn, 2009). Monopolistic Competition In monopolistic competition, numerous firms are involved in dealing with identical products that are unique from each other. The products produced by the firms can be differentiated from each other’s functionality and type. Selling strategies, design, workmanship as well as service attributes serve as a base for differentiating the products in monopolistic competition (McConnell, Brue & Flynn, 2009). The market has low entry as well as exit barrier followed by a non-price competition amid the sellers. The consumers of the monopolistic market view each product distinctly and find distinguished features of the different products produced by the firms. However, these products are even considered as substitutes owing to the similar level of satisfaction they provide. The monopolistic firms are mostly the restaurants and the hotels that deliver similar products and/or services with differentiable features. In a monopolistic competition, the price of the products set by firms is always equal to the average cost at the time of entry or exit (Pearson Education, 2010; McConnell, Brue & Flynn, 2009; Lee, n.d.). Oligopoly The oligopoly market constitutes few figure of sellers dealing with a standardized or distinguished product. This market model can be defined as a market model of imperfect competition. One of the prime features of this particular market is that there lay numerous buyers in comparison with sellers. It is worth mentioning that the firms continuously vary the prices of the marketplace and the products have greater price variability. It can be ascertained that the new firms face barriers while entering into this type of market. In this regard, the imperative barrier is recognized to be the economies of scale along with the government-imposed obligations (McConnell, Brue & Flynn, 2009; Mazzeo, 2002; Bass, Haruvy & Prasad, n.d.). Unlike other markets, an oligopoly market does not experience perfect competition and a seller is being enough to affect the market supply. The product price relating to such markets is mainly determined through keeping into concern the preference of the existing rivals present in the market. One of the most popular oligopolistic markets is the automobile industry wherein the above discussed facets can be witnessed (The Ohio State University, 2014; Haruvy & Prasad, n.d.). Monopoly Monopoly or pure monopoly is defined as a particular market structure, wherein there lays only a particular seller selling varied products/ services. One of the features of this sort of market is identified to be the restriction of entry of new firms. Owing to the presence of a single seller, the market and the firms catering business are synonymous. By taking into concern the fact that entry and exit barriers occurs out of the economies of scale, new firms lacks the capability to afford the costs incurred in the start-up phase of this kind of market. However, due to the single determinant of the market, the supply of the products is highly dependent on the firms catering business. Hence, this makes the monopoly firms acting as the price makers of the pure monopoly market. Unlike the purely competitive market, the nonexistence of substitute products often makes the firm non-price competitive. One of the prominent examples of monopoly market is the government owned public utilities like the natural gas and the electric companies. Owing to its identifiable presence in the market, the firms hold the capability to reduce or increase price as when required (McConnell, Brue & Flynn, 2009; Fullerton College, 2007). Part II Relationship among the Economic Concepts Business Cycle is defined as the alternating rise and decline of economic activity. In this similar context, inflation is an economic concept, which represents the increase in the overall level of prices. Inflation reduces the purchasing power of money. Again, a gross domestic product (GDP) is “the total market value of all final goods and services produced annually within the boundaries of a nation” (McConnell, Brue & Flynn, 2009). Unemployment is the failure of effectively utilizing the accessible valuable resources to produce employment opportunity for the labor force. Finally, interest is the price paid for the use of money. It has been widely observed that these economic concepts are interwoven with each other and determines the macroeconomic factors affecting the market structure (McConnell, Brue & Flynn, 2009). The relationship between business cycle and GDP can be explained as observing the rise and the fall of the GDP of a nation. Notably, the GDP of a nation is mainly determined through calculating the demand of the goods as well as the services produced in a nation, whereas, business cycle is concerned with the demand of the finished products within a certain time period. GDP and business cycle are directly proportional to each other. This could be observed from the fact that the business cycle touches the peak position at the time of GDP expansion. Again, the business cycle tends to be in trough position at the time when the GDP growth of a nation shrinks (McConnell, Brue & Flynn, 2009). The relation prevailing amid the business cycle and GDP can be better explained from the following graph. Fig.1: Relation between GDP and Business Cycle Source: (McConnell, Brue & Flynn, 2009) The above daigram elaborates that at the time of recession, GDP falls and the business cycle inclines towards trough position and again when the economic growth tends to expand, the business cycle move towards peak situation. This phenomenon repeats in a cyclic manner with the rise and the fall of the economic conditons and most vitally the market structure. However, it could be broadly observed that the business cycle runs through three particular phases namely ‘expansion’, ‘contraction’ and ‘recovery.’ These are generally tracked depending on the trends of GDP and unemployment rate. The phenomenon suggests that GDP rises and unemployment reduces at the time of expansion phase and the reverse happens at recession stage. As per the Okun’s Law, it can be ascertained that with every 1% increase in the GDP, a decrease in 0.5% of unemployment is witnessed (Sinclair, 2004). Subsequently, it has been apparently observed that inflation does not tend to fall during the time of recession and rise at the time of the recovery of the economy. Obviously, it can also be noted that the lower rate of unemployment results in higher output of the nation resulting in earning more wages, which increases the buying capacity of the populaces at large. This result in increase in demand within the national boundaries, which causes the price of the goods as well as services to rise and finally results in causing inflation (McConnell, Brue & Flynn, 2009). The inverse relationship exists between unemployment and inflation can be witnessed from the fact that with the decrease in unemployment, inflation increases and vice versa. Considering the fact that the increase in inflation leads to the fall in purchasing power of money, this eventually results in the fall in the GDP of any nation as well as hampers the business cycle by a certain degree. Thus, it can be affirmed that with the fall in the ‘purchasing power of money’, a sustained increase in the average worth of all goods as well as services manufactured in an economy can be witnessed. This change in the inflation rate causes a positive effect in the ‘Time Value of Money’ (TVM), which is a major determinant of interest rate. The changes in the inflation rate cause a corresponding change in the interest rate of an economy. As a result of inflation, it is quite obvious that the value of money will get eroded over the tenure. Thus, at the time of inflation, the interest rates tend to increase at large. Considering this phenomenon, it can be affirmed from a broader understanding that there exists an inverse relationship between inflation and interest rate (McConnell, Brue & Flynn, 2009; Cedar Spring Software Inc., 2004). Observing the above discussed facts, it can be stated that with the growth in the GDP level, the business cycle touches the peak position and the unemployment level of an economy shrinks. This eventually results in the increase of the buying power of the economy and causes an increase in demand for the goods and/or services, which in turn causes inflation. The increase in the rate of inflation leads to an increase in the interest rates for loans. The upsurge in the rate of interests results in the decrease in availability of the funds, as people tend to borrow smaller amount of the same at affordable interest rate. This phenomenon causes the amount of capital invested in the business to fall and the business cycle inclines towards the trough situation. Owing to the downward trend of individual business cycle, the GDP of an economy falls, resulting in the growth of unemployment. Unemployment leads to the lower buying capacity amid the people, which leads to deflation and the cycle continues (McConnell, Brue & Flynn, 2009). Conclusion The different market structures operating in an economy are highly diverse. Owing to the differences persisting in the market structure, the operational functions of the sellers as well as the buyers differ accordingly. Observing the diverse characteristics of markets, the macroeconomic environment has varied effects on the functionality of the firms operating under different markets. It can be affirmed that the firms operating under the monopoly market will have less effect with regards to the change in the macroeconomic environment, however, the same change will be quite sensitive for the perfect competitive market. Again, it has been apparently noted that the economic concepts are highly interlinked with each other. Owing to the relationship depicted amid the different economic concepts, it is quite clear that the change in one unit causes a change in the complete macroeconomic environment. This overall change in the macroeconomic environment causes a visible effect on the market structures and the individual firms operating under diverse markets. It is worth mentioning that the above discussed economic concepts and their dependencies on each other becomes a major factor or variable for determining the market structures and respective operations within an economy. References Bass, F., Haruvy, E., & Prasad, A. (n.d.). Variable pricing in oligopoly markets. Journal of Business, 1-10. Cedar Spring Software, Inc. (2004). Price inflation. Retrieved from http://www.getobjects.com/Components/Finance/TVM/inflation.html Fullerton College. (2007). Pure monopoly. Retrieved from http://staffwww.fullcoll.edu/fchan/Micro/4pure_monopoly.htm Hall, R. E. (1986). Market structure and macroeconomic fluctuation. Brookings Papers on Economic Activity, 2, 1-20. Jaimovich, E. (2012). Perfect competition. Retrieved from http://www.estebanjaimovich.com/Lecture%202%20-%20Perfect%20Competition.pdf Lee, J. (n.d.). Features of monopolistic competition. Lecture Notes, 15, 1-7. Mazzeo, M. J. (2002). Product choice and oligopoly market structure. RAND Journal of Economics, 33 (2), 1-22. McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009 Economics: principles, problems and policies. United States: McGraw-Hill/Irwin. OUM. (2013). Introduction to macroeconomics. Retrieved from http://www.oum.edu.my/oum/v3/download/BBEK4203.pdf Pearson Education. (2010). Price and output determination in monopolistic competition. Retrieved from http://wps.prenhall.com/bp_casefair_econf_7e/30/7934/2031304.cw/index.html Sinclair, T. M. (2004). Permanent and transitory movements in output and unemployment: Okun’s law persists. Department of Economics, pp. 2-15. The Ohio State University. (2014). Oligopoly. Retrieved from http://www.econ.ohio-state.edu/jpeck/H200/EconH200L13.pdf Tulane University. (2011). Macroeconomics defined. Retrieved from http://www.tulane.edu/~woakland/econ102/lectures/lec2out.pdf Read More