The Four Market Structures - Essay Example

Monopolistic competition prevails in a market where there is a large number of sellers manufacturing different products like furniture, clothing and books. In this setting, there is a nonprice competition (or product differentiation) where the selling strategy is to distinguish their product from competing products or services on the basis of workmanship and design.

In an oligopoly setting, there are a few sellers that sell a differentiated or standardized product where the decision of competitors affects the sale of a firm. Therefore, firms consider the strategies of competitors to determine their output and price (McConnell 2005 p.177).

1. When should a start-up company expect profit? Is there a rule of thumb?

A start-up company can expect a profit when the business is able to cover the expenses including the start-up costs. The sale of products should earn enough revenue to meet ongoing expenses associated with the operation of the business. A start-up business entrepreneur must realize that a product sales amounting to $10,000 will not cover monthly overhead expenses of $10,000 because the sales returns have a gross profit of only around $4000.  A business reaches a break-even point when the sales revenue is equal to all business costs. The break-even point can be calculated by identifying the fixed costs and variable costs. Fixed costs are expenses that do not change with changes in the volume of sales. For example, administrative salaries and rent remain the same and are expenses that must be met regularly irrespective of the volume of sales. These are usually known as overhead costs. Variable costs fluctuate with changes in the volume of sales. Variable expenses like shipping, purchasing inventory and manufacturing costs of a product have to be met for a start-up company to make a profit.

The rule of thumb for a start-up company is to reach the break-even point to expect profit from the manufacture and sale of a product (Programs and services).

How does a monopoly affect income distribution? 

Market structure and the distribution of income raise concerns about the formation of monopoly power where the increased concentration of control moves into the hands of a few monopolistic firms. Monopoly leads to decreased competition among firms and inefficient distribution of resources in the economy.  Monopoly has an impact on the distribution of income. Research indicates that monopoly power reduces the income share of workers when compared to capitalists, and results in a decrease from two percent to nine percent in their income though historically it does not result in much costs to the society (Green 1990 p.26-27)

Monopoly and the distribution of income are associated by Kalecki to explain income distribution and the extent of accumulation in the economy which has an effect on the national income. The share of wage in an industrial capitalist economy and the cost of the basic raw materials from the monopolistic perspectives; the wage share is correlated to the cost which forms the variables in the production process. When the costs of other variables are static, the intensification of the extent of monopoly can lead to a wide margin between the price and cost. In other words, the price of the product will rise with a relative increase in the price of inputs. Since the aggregate income is a part of the cost, such intensification of monopoly leads to a decrease in its share of the national income.  Likewise, while other variables are static and the outlay on essential raw materials increases (the expense on non-labor inputs), the income share will further decline as a fraction of the aggregate revenue.  A change in any of the variables in the long or short run has an impact on the wages of the laborers (Mitra 2005 p.85).

Assume the following unit cost data are for a purely competitive firm 

Total Product 

Average

Fixed cost

Average

variable cost

Average

total cost

Price

0

4

$15

 $37.50

 $52.50

$32

5

12

37

49

38

6

10

37

47

41

7

8.57

37

47

46

8

7.5

40

46

56

1. 
   At $32, will the firm produce in the short run? Why or why not?
   At, $32 the firm will shut down because the average variable cost is higher than the market price and cannot meet its variable expenses for running the business.
2. At $41, should the firm produce in the short run? Why or why not?

When the price of the product is $41 the firm can produce in the short run because the profit-maximizing rule applies to the purely competitive firms when marginal cost is equal to or less than the market revenue (McConnell 2005 p.211).

1. At $56, should the firm produce in the short run? Why or why not?

The firm can produce in the short run when the market price is $56 because it is more than the average variable cost.