Market Structure and the Role of Government - Assignment Example

Market Structure and the Role of Government Characteristics of the Four Primary Market Structures The term ‘market structures’ refers to a particular social organization which operates between buyers and clients in any given market. Others define market structures as models that govern social organization between clients and businesses in a market. Since the four market structures are perfect competition, monopolistic competition, oligopoly and monopoly, the characteristics of these market structures differ. In perfect structure, supply and demand as competitive market forces control prices in the market and output levels of produce rendered by competitive firms. In both perfect and monopolistic competition and structures, there are multiple participants and the commodity of trade is homogenous. Monopolistic competition is an intermediary of the two extremes that characterize monopolistic and competitive markets. Herein, there are several firms each with small proportions of market share and an extent of differentiated products. These competitive firms are also price makers. In a monopoly, the product of trade is one, while in an oligopolistic market structure, a number of firms maintain control over the market share. There are neither competitors in a monopolistic market nor close substitutes for the product. In an oligopoly, there is a tendency to compete on non-pricing criteria which include advertising, gift certificates, packaging and transportation. Why Economic Profits Are Zero In The Long Run in a Monopolistically Competitive Market As mentioned earlier, a monopolistically competitive market is one in which there is an imperfect competition to the effect that products that are differentiated from each other (but are not substitutes of each other) are sold by one or two producers. The long-run attributes of this kind of market are similar to those in perfectly competitive market. In this kind of competition, an organization that actualizes profit in the short run realizes in the long run, that it was only able to break even. This is because the demand for products in a monopolistically competitive market decreases as the average total cost of the same increases. The development above happens thus. Because of receding demand, firms can temporarily actualize profit if the prices set exceed the average cost. This happens even as limitations on barriers to entry bring about normal profits. By and by, other firms infiltrate the market, leading to the plummeting of the market share. This eventually degenerates into a decrease in product demand. Resultantly, as the demand curve continually shifts to the left, product prices fall to a point where it evens out with the average total cost (Cleverly, Song, and Cleverly, 2010). The Characteristics of a Public Good Being values that benefit anyone in the society, public goods are also referred to as collective or social goods. One of the chief attributes of public goods is non-excludability. This means that there can be no exclusion of any individual or party from consuming these goods or services. It is against this backdrop that public goods are considered by economists as the second cause of market failure. Market failure in this case refers to the inability to achieve Pareto efficiency. The attempt to achieve Pareto efficiency in healthcare services sector is futile because of externalities, particularly external costs. The second characteristic of public goods is non-rivalry. This simply means that in any individual’s consumption of that product, another person’s chance to consume the same (good) must not be diminished. Examples of public goods may be healthcare services, security and education. This also accounts for the inability to attain Pareto efficiency since even the First and most Fundamental Theory of Welfare Economics readily acknowledge and rely on the perfectly competitive nature of markets. Two Ways in Which Product Differentiation Affects the Demand for a Product Basically, product differentiation refers to a marketing strategy or process that is aimed at showcasing the difference between the product being sold and its competitors. Thus, the product is made more attractive and its unique and desirable qualities are contrasted with competing brands. This leads to a product being seen as superior and unique to its rivals and thereby, the demand for the same product increases. Likewise, as part of product differentiation, packaging and branding (not necessarily changing quality) a product may increase the demand of the same, due to increased attractiveness. Similarly, product differentiation heightens brand loyalty and thereby increasing the demand of the product. This increased demand allows the firm to continue to sell the product and to even adjust prices upwards. Conversely, in the event that the market has been accustomed to the covering of malpractices and disguising of anti-features by using repackaging and rebranding, the demand for the target product may wane. Five Different Forms of Government Intervention in the Economy Seldom does any government grant the economy laissez faire, due to the danger of exploitation. Likewise, it is important for the government to ensure uninterrupted flow of public goods and essential services and to consolidate consumer protection. To execute this, there are several ways through which the government intervenes in the economy. The government intervenes in the economy by levying taxes on the citizens and organizations. Mainly, this is done to ensure continuity of public goods such as infrastructure, security and welfare programs. Secondly, the government intervenes on the economy by using price caps. Herein, the government may set price floors and price ceilings. Price floors refer to minimum prices that have been set by the government. The government normally uses price floors when seeking to raise and reduce producer surplus and consumer surplus, respectively. Governments may also use price ceilings by quoting the highest legal price possible. Many governments may also extend certain sectors, subsidies, as an artifice to ensure the production of certain goods or services. This is common where these products are not profitable in free markets. Likewise, governments also impose tariffs (taxes) on imports. The government usually uses tariffs in order to heighten the competitiveness of domestic products. References Cleverly, W., Song, P., & Cleverly, J. (2010). Essentials of health care. New York: Jones & Bartlett Learning. Read More