Four Types of Market - Assignment Example

Four Types of Market Introduction There are different buyers and sellers in the market therefore a competition develops or exists in the market which generally allows the price to change in accordance with the change in the demand and supply. There may or may not be substitutes for the product in the market. The markets can be broadly classified into four type’s namely perfectly competitive market, monopoly, oligopoly and monopolistic market. The perfect competition is characterized by the market where there is the existence of large numbers of buyers and sellers. And it deals with the similar products having large number of substitutes. Monopoly market can be defined as the market where there is the existence of only single producer or seller. It has full control over the determination of price of its products. Oligopoly market is referred to as the market where there is the existence of only few firms that combines to make the industry. This market deals in the product that are identical to each other. Monopolistic competition is characterized by the market in which the producers are mainly engaged in producing the products that are different from others and therefore the products are not substitute for each other. Discussion Q2. Characteristics of the four markets Perfectly competitive Market Perfect competition can be defined as the market in which the number of participants is less. The firms generally sell identical products in the perfectly competitive market. The price taker in the perfectly competitive market can be defined under the perfectly competitive market as the buyer or the seller who is unable to influence the market price (Machovec, 2002). The characteristics of the perfectly competitive market are: 1. The firm aims to maximize its profit. The profit is calculated by subtracting the total cost from the total revenue. Total revenue is the addition of the marginal revenue and average revenue. Figure 1: Profit or loss on the cost curve 2. The firm has to decide whether to continue its operation or close down its operation in short run. As sometimes the firm decides to stop its production temporarily for sometimes. Figure 2: Firm Short run supply curve 3. The firms in perfect competitive market sell identical products. The buyers are unable to find out the differences. The buyers are aware with the price charged by the respective sellers which restricts the other firms to charge high price for the same product. 4. The new firm can easily enter and exit in the long run. The firm enters the market in the long run if it earns economic profit and exits the market it faces economic losses in the long run. Figure 3: Economic profit Figure 4: Economic losses The figure 3 and 4 represents that the outcome of the free entry and exit of the new firms leads to a typical break even. Monopoly Monopoly market can be explained as the firm that is engaged in the sale of goods and services that do not have close substitute (Sherman, 1989). The main characteristics of monopoly market are: 1. The monopoly market has no close substitutes for its products and the market has a single seller. It deals with natural monopoly where one single firm is responsible for supplying the whole market. Figure 5: Natural monopoly 2. The demand for the product under monopoly market slopes downward to the right. Figure 6: Profit maximization for monopolist 3. The monopolist can charge different price from different customers. A monopolist firm earn huge amount of profit in the long run and it has the ability to sustain loss in the short run. 4. The firm can continue its operation only when there is no other firm in the industry. Oligopoly Oligopoly can be defined as the market where the firms are less competitive. The market is competed with large number of small interdependent firms (Friedman, 1983). The main characteristics of the oligopoly market are: 1. The price charged under oligopoly is very rigid. Because if the price is reduced by one firm the other firms also reduces the price of their products. Figure 7: Crude oil prices in oligopoly market 2. Under oligopoly a small amount of monopoly exist as each firm is engaged in the production of differentiated products. 3. The oligopoly market prioritizes on selling and advertising cost of its firms in order to widen its market share and maximizing its sale. 4. Under oligopoly market the firms are very interdependent in taking decision about the change in the price and product of the firm. Monopolistic Competition Monopolistic competition determines the market in which the barrier for the entry of the new firms are less and there exist a competition among the firms for selling similar products but the products are not identical to each other (Solow, 1998). The main characteristics of the firm under monopolistic competition are: 1. There are large numbers of firms that are engaged in selling homogeneous products. 2. The differences are made in the selling cost by the sellers which are communicated to the buyers. 3. The firms are independent to enter and exit in the market. 4. It enjoys some sort of monopoly by distinguishing its products from its competitors on the basis of the size, color, and brand of its products. Similarity in the four markets in terms of determination of its price and output. Figure 8: Perfectly competitive market Under perfectly competitive market the relationship between price and output can be explained by the fact that when there is maximum difference between the total cost and total revenue it leads or results in the increase of profit. If the price is greater than average total cost it signifies that the firm is earning profit. Figure 9: Monopoly Market Under monopoly the monopolist tends to decrease the output at a level in which the revenue is equal to the cost. The downward curve represents that the monopolist can change the price that is charged and can sell many products at that price. Figure 10: Oligopoly market The demand curve is inelastic as the firm will not be able to increase the demand for its product by lowering the price. It establishes the economies of scale which determines the limit of competition in the industry. Figure 11: Monopolistic Competition The demand curve is downward sloping which represents that if the cost of the product increases, the firm will lose some of its customers but not all of its customers. With the help of the analysis of the demand curve of all the market it is found that the demand curve of the firm for all the market is downward sloping. Dissimilarity of the four markets in terms of determining its price and output. When the market is perfectly competitive the intersection of the demand and the supply curve represents the equilibrium price and quantity. And under monopoly the supply curve represents the marginal cost curve of the monopolist. Perfect competitive market is considered as the price taker as it has no control over its price. Monopoly is regarded as the price maker it fixes the price for its product. Monopolistic competition has partial control over its price. Oligopoly can change its price but it prefers rigidity. Q3.Comment upon and contrast the economic efficiency of the outcomes under perfect competition and monopoly. Figure 12: Economic efficiency under perfect competition In the long run the perfectly competitive market economic efficiency is achieved by the firm by producing the quantity where the average total cost is less. The firm tends to achieve economic efficiency by reducing the cost of producing the quantity which will result in increase of the profit. The profit is zero in the perfectly competitive market under long run. In the long run the firm can be dragged out from its firm by more efficient competitors. And in case of the industry the firms are generally compelled in producing a quantity where the average total cost is less. Figure 13: Economic efficiency under Monopoly The firms under monopoly tend to reduce the cost of producing the quantity and increasing the profit in order to maximize its profit. Industry tries to achieve the economic efficiency by producing the product when the average total cost curve is at its minimum point. Under monopoly the firm believes that in order to introduce new product in the market the firm is require making expenditure for conducting research and development. The reason is that the firms with market power are more prone to earn profit as compared to the perfectly competitive firms. The competitive market too carries out research and development for introduction of new products in the market. The market power can be defined as the capacity of the firm to charge a price for its product which is greater than its marginal cost. The merger may lead to the increase in efficiency and in reduction of the cost for the new firms. Comparison between perfect competition and monopoly The perfect competitive market has the least market power since the perfectly competitive firms are price takers that results in producing the most efficient outcomes. On the contrary the monopoly market possesses potential market power that results in producing the least efficient outcomes. Therefore in a nutshell it can be analyzed that perfectly competitive market results in producing more efficient outcomes whereas the monopolies results in producing the least efficient outcomes. Therefore in order to adopt an appropriate policy the aim is to increase the efficiency that would result in decreasing the monopoly power and increasing the extent of competition in the monopoly markets. Conclusion The four types of market namely the perfectly competitive market, monopoly, oligopoly and monopolistic competition have different characteristics and features. Perfectly competitive market is concerned with productive and allocative efficiency. Productive efficiency can be defined as the situation in which the goods and services are produced at a lower cost. And allocative efficiency refers to as the state in which the production is represented by the preference of its consumers and it produces the goods to the extent where the marginal benefit is equal to the marginal cost. Under monopoly the firm mainly increases its economic efficiency by increasing the market power and focusing on the change in technology. Under oligopoly market the firms are mainly concerned with fixing the price for its products and enjoying the price leadership. Porter five forces model also plays an important role in oligopoly market. Monopolistic competition market mainly focuses on the various advertisement strategies for differentiating its products from its competitors. References Friedman, J. (1983). Oligopoly Theory. New York: CUP Archive. Machovec, F. (2002). Perfect Competition and the Transformation of Economics. New York. Routledge. Sherman, R. (1989). The Regulation of Monopoly. New York: Cambridge University Press. Solow, R.M. (1998). Monopolistic Competition and Macroeconomic Theory. New York: Cambridge University Press. Read More