Summary

This document provides an overview of different market structures, including perfect competition, monopolistic competition, oligopoly, and monopoly. It describes the characteristics, outcomes, and examples of each structure. Key economic concepts like allocative efficiency and price control are also discussed.

Full Transcript

Market structures refer to the organizational and competitive characteristics of a market. They describe how firms interact within a market, the nature of competition, and the level of control individual businesses have over prices and production. Ther...

Market structures refer to the organizational and competitive characteristics of a market. They describe how firms interact within a market, the nature of competition, and the level of control individual businesses have over prices and production. There are four primary market structures, each with distinct characteristics: 1. Perfect Competition: ★​Definition: A market structure wherein a large number of small firms produce identical products and no single firm has market control ★​It is the most idealized market structure ★​Characteristics : -​ Number of firms: Many firms, and no single firm has any significant market power -​ The choice of a buyer or seller has the same effect on the market as a drop of water in the ocean (naks) -​ Product type: Homogenous, buyers can easily switch between firms -​ Barriers to entry : Very low or none -​ Pricing power : Price takers firms are influenced by buyers -​ Examples : Agriculture markets, like wheat or corn. ★​Outcomes : - Allocative efficiency : Resources are allocated in a way that maximizes consumer satisfaction. - Productive efficiency : Firms operate at the lowest possible cost in the long run. - Normal profits : In the long run, firms earn just enough to cover their costs (including opportunity costs). 2. Monopolistic Competition: ★​Definition: A market structure where many firms sell similar but differentiated products ★​Characteristics : -​ Many buyers and sellers : There are numerous firms in the market. -​ Product differentiation : Firms offer similar but not identical products, which leads to brand loyalty. -​ Some barriers to entry : While barriers exist, they are relatively low. -​ Price makers : Firms have some control over their prices due to product differentiation. -​ Incomplete information : Buyers may not have perfect knowledge of all options. ★​Examples : Restaurants, clothing brands, brands in general ★​Outcomes : -​ Non-price competition : Firms compete based on product features, quality, or marketing. -​ Allocative inefficiency : Price is typically higher than the marginal cost. -​ Excess capacity : Firms do not produce at the lowest cost. -​ Normal profits in the long run : Like perfect competition, firms earn just enough to cover costs. 3. Oligopoly : ★​Definition: A market structure in which market is shared by a small number of producers, exclusive ★​Characteristics : -​ Mother companies : Car industry, banking, supermarkets, medicinal drugs, cell phone service providers -​ Collude with each other : This is illegal -​ Corporation, inc, lmt, unlmt : Universal Robina Corp, Jollibee Foods Corp, Petron Corp, Monsters Inc. -​ Few large firms : A small number of firms dominate the market, each with significant market power. -​ Interdependence : Firms must consider the actions of rivals when making decisions (e.g., price changes or output decisions). -​ Barriers to entry : High barriers exist, including high startup costs, brand loyalty, and economies of scale. -​ Product differentiation or homogeneity : Products may be differentiated (e.g., cars) or standardized (e.g., oil). -​ Price makers : Firms have some control over prices but are constrained by the actions of competitors. ★​Examples : Automobile industry, telecommunications, airlines, tech ★​Outcomes : -​ Price rigidity : Prices often remain stable due to tacit collusion or the kinked demand curve. -​ Non-price competition : Firms often compete through advertising, quality, or other factors rather than price. -​ Potential for collusion : Firms might form cartels to set prices and output, although this is illegal in many countries. 4. Monopoly : ★​Definition: Market structure that consists of a single producer and no close substitutes ★​ Characteristics: -​ Single seller : One firm controls the entire market. -​ Unique product : No close substitutes for the product or service. -​ High barriers to entry : These may include high capital costs, government regulation, or control of essential resources. -​ Price maker : The monopolist sets the price and output level. -​ Imperfect information : Consumers may not have full information about the monopoly's prices and practices. ★​Examples : Utility companies (e.g., water or electricity providers i.e electricity), patented drugs. - Outcomes : - Allocative inefficiency : The monopolist typically charges a higher price than in competitive markets, leading to a deadweight loss. - Productive inefficiency : Monopolies may not produce at the lowest cost, as they lack competitive pressure. - Economic profits : Monopolists can earn long-term economic profits due to barriers to entry. - Potential for innovation : While monopolies may not innovate as much as competitive firms, they sometimes invest heavily in research and development due to high profits. 5. Monopsony : ★​Definition: Consists of one buyer and many sellers ★​ Characteristics: -​ One customer (can be gov) : Sellers depend on one customer -​ Limited buyers : Only one company has a demand for a specific product -​ Barriers to entry : Moderate to high -​ Price control : Buyer forces sellers to lower prices ★​Examples : Labor market

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