Since the ordinary level, we have to learn about Economics. As the Economy, we define how people fulfil their unlimited wants and needs using available limited scarcity resources. Firms produce goods and services for people’s consumption.

Firms always consider about profit maximization. Likewise, people always try to maximize their satisfaction. Firms decide what output level we must produce and at what price we must sell. All firms depend on types of market structures. All firms fall into the above-market structures.

Market structure

There are four types of markets in the Economy. They depend on under main characteristics.

  • perfect competition
  • monopoly
  • oligopoly
  • monopolistic competition

Economists categorized these types under five characteristics,

  • number of sellers
  • Type of product
  • Barriers to entry
  • power to affect the price
  • non-price competition

Perfect competition

There are five main conditions in the perfect competition,

  • Many buyers and sellers
  • Homogeneous product
  • Free entry and free exit
  • Customers have perfect knowledge about the market
  • Under the above conditions, the perfect competition will  be price-taker

Perfect competition has many buyers and sellers. So one supplier or buyer represents a minimal quantity in the whole market. They face a market-determined price and buy under this price.

Perfect competition structure sells standardised or homogeneous products. In this condition, people’s satisfaction is the same, no matter who is the seller. Because the market has one same product. No matter what the seller buys, customers get the same satisfaction. All sellers sell a similar outcome.

In this type, we can identify free entry and free exit to the market because there have many buyers and sellers. So anyone can make entry and exit T, and there are no barriers for it. Here, profitable firms produce their products furthermore. Non-profitable firms exit the market. Profit is the one matter to getting enter the firms into the market as well as nonprofit firms avoid the entrance.

Customers have perfect knowledge of the market. Therefore sellers can’t cheat people. Sellers can’t sell their products at high prices. The reason is that the whole market has the same price and the same product. Sellers can’t change their prices. They have to sell at a determined price.

Under the above condition, the perfect competition will be a price-taker. This means is that firms can’t change the determined price. There are similar products. Customers get the same satisfaction. As well as customers have perfect knowledge about the market. Therefore sellers have to face a determined price. The rice industry is the best example of perfect competition.

perfect competition profit maximization in the short-run

In this period, managers should make two decisions.

  1. Produce or Shutdown
    • If shutdown, firms lose an amount equal to TFC ( total fixed cost). Shutdown meaning is firms stop producing. If the firm shut down, there should be some rules.
      • Total revenue can not cover the total variable cost ( TR<TVC)
      • produce zero output and shutdown price is minimum AVC
    • if not also include shutdown price is minimum AVC firms stop their producing. Because they can’t even cover the total available cost.
  2. Produce what the optimal level is
    • short-run profit maximisation has two approaches.

Total revenue – total cost  

Managers have to find three answers to three questions. They are, should the firms produce? What quantity must provide? And what profit or loss will achieve?.if it is a profit, or a lossless than its fixed costs, firms profit is maximization.

Marginal revenue= Marginal cost

In perfect competition, MR=MC  rule means there is profit maximization. Under this rule, the always determined price is must be quals marginal cost. (P=MC) this rule can apply to all markets.

Monopoly

Monopoly have five main conditions.

  • Pure monopoly market structure has one seller
  • there is one product. No substitutes goods
  • barriers to entry are very high
  • The power to affect prices is very high. Because there has one seller
  • Monopoly will be a price- taker

A pure monopoly has one seller, and there is no substitute. A monopoly product is unique because it has a single seller. Customers haven’t any other choice in there. They have to buy only one product without it and no substitutes. A monopoly will be a price- taker because of the above condition. The seller can change the determined amount. A single seller market is overpowered. The pure monopoly demand curve is usually downward slope. It can vary by changing the price. When the rate is increasing, the quantity will be decline.

A monopoly market type has blocked entring. There are barriers to entry and exit. When a firm is entering the market, firms have to face a lot of barries. They have to face financial obstacles, information costs, and government regulations. Firms can not get information without fees as well as government regulations affect to entering the market. For example, the pharmaceutical industry has to bent for patent laws. We can identify that there are barriers to entry and exits. Water company, local telephone company, cable tv company, natural gas, and electric companies and railway service are the examples for monopoly market type. We have to choose goods or services even though we like or dislike in the pure monopoly type.

Oligopoly

oligopoly is the another market type what we discuss.Oligopoly means that few selling. there are main features.

  • Number of sellers are few
  • product type is homogeneous or differentiated
  • barriers to entry are high
  • medium power to affect the price
  • heavy advertising and product differentiation

Few firms, a relatively small number of firms are in here. The oligopoly product type is standardized or differentiated. Steel, chemicals, and paper are similar products and cars; electronic products breakfast cereals are differentiated products. There are significant barriers to entry and exit. An oligopoly demand curve is an inelastic demand. Oligopoly has heavy advertising. It has a reliable market power.

Monopolistic compitition

Monopolistic compitition has main five condition.

  • Many sellers and buyrs
  • Differentiated product
  • Barriers to entry is low
  • power to affect price is low
  • Advertising and product differentition

This type has many sellers and buyers. It is relatively easy to enter or exit the market. All firms produce differentiated products. There are low barriers to entry and leaving. The monopolistic competition uses advertisements. Monopolistic competition and perfect competition have the same features. They are many sellers and buyers access to entering and leaving. Books, CDs, movies, computer games, restaurants, and furniture are included in the monopolistic competition.

Summary of the market structures

Market StructureNumber Of SellersType Of ProductBarriers To EntryPower to affect price
Perfect CompitionManyhomogeneousnonenone
Monopolyonesingal productvery highhigh
Oligopolyfewhomogeneous or differntiatedhighmedium
Monopolistic compititionmanydifferntitatedlowlow

LET US READ ABOUT CONSUMER BEHAVIOUR

2 COMMENTS

LEAVE A REPLY

Please enter your comment!
Please enter your name here