• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Compare and contrast 2 types of market structure using the economic models you have been introduced to in term 1 on which to base your discussion

Extracts from this document...


CB559 Business Economics 1. Compare and contrast 2 types of market structure using the economic models you have been introduced to in term 1 on which to base your discussion. I will first define market structure (in economic terms) as the characteristics of a market that influences the behaviour and performance of firms that sell in the market. There are four main market structures, Perfect competition, Monopolistic competition, Oligopoly and Monopoly. For this essay I have chosen to compare and contrast Perfect competition with Monopoly. I have chosen to examine these in particular as I feel in a company's life cycle it has the possibility of becoming both. I will now define Perfect competition as a market structure in which all firms in an industry are price takers and in which there is freedom of entry and exit. (Sloman 2004) And Monopoly as a market structure that contains only one firm. (Sloman 2004) Firstly I will begin by examining characteristics of the two market structures. Perfect competition is the most competitive market structure and is considered to be an ideal form of providing goods and services to consumers at maximum efficiency (P=MC). The reason for this is that there are many firms in the industry and so an individual's contribution to supply is insignificant to the overall market price. ...read more.


None the less, the model of perfect competition gives us some key insights into the working of any market economy. It shows a simple example within which to understand the principles of profit maximization and highlights the incentives played by profits in driving the entry and exit of firms. Finally, it provides a target for the optimal allocation of resources. The other extreme of market structure is Monopoly. A pure monopoly is an industry composed of a single seller/producer with hardly any substitute and with high barriers to entry. Unlike the firm under perfect competition, the monopoly firm is a 'price-maker'. The firm is generally seen as inelastic, as a change in price will lead to a very small change in quantity demanded because consumers have no alternative firm to turn to within the industry. They either pay the higher price, or go without the good altogether. However, monopoly firms cannot set whatever price they like, they can only charge the maximum price that the consumer is willing to pay as it is still constrained by its demand curve. As with firms in other market structures, a monopolist will maximise profit where MC=MR. This results in super-normal profits and can attract other firms into the market. In the short-run monopolies maximise its profits by producing where marginal cost equals marginal revenue, both are less than the price it charges for output. ...read more.


Overall, a monopoly can react the same way as a firm in perfect competition. For example if a monopoly is protected by high barriers to entry (i.e. it owns all the raw materials) then it will be able to make supernormal profits with no fear of competition. If however, another firm innovates a similar product, it will behave more like a competitive firm possibly focusing on customer relation or price reduction. Thus concluding the threat of competition has a similar effect to actual competition. Another similarity in terms of production is any firm (in any market structure) who does not equate the marginal cost of production of an identical product between production plants, is failing to maximise profits. Firms could reduce total costs for the same output by rearranging production between its plants. To finish off, it's imperative to know (as a firm) what market structure you are in as this has massive implications on your business activity and decisions i.e. efficiency, price of products, negotiation tactics etc. It could also be said that significant attention should be on competitors at all times as their actions will have a ripple effect on your business. Therefore its vital for any firm in either perfect competitive or monopoly, to not get complacent, as one unnoticed move, or late reaction (be it a reduction in price or introduction of a new product), could put the future of your company in severe peril. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Microeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Microeconomics essays

  1. What is the nature of uncertainty in a model of oligopoly, and how does ...

    Initially, the new entrant will maintain a low level of output in response to the original high level of output by the original firm. However as time passes, the increased supply due to the new entrant brings down prices and the initial monopoly producing firm is forced to decrease production.

  2. Is profit maximisation the key objective of a firm?

    In theory; the shareholders being the owners of the firm will control its activities. However, in practice this can be difficult amongst larger corporations as control often lies in the hands of the directors. It can be tough for any firm to exact change for the thousands of shareholders, each with a small stake.

  1. Explain Cournot, Bertrand and Stackelberg models of oligopoly assuming that the firms have identical ...

    From this it can be seen that a monopoly is a specific case of an oligopoly as the monopolist would have the entire market share and tends to zero. Bertrand The Bertrand model is one of simultaneous price setting and is related to Cournot's model, but the strategic variable is price rather than quantity produced.

  2. Free essay

    Analysis of market structure in the airline industry.

    fund the investment as they cost no less than �20 million; the costs of research and development can be integrated within aircraft cost; fuel is also an expensive commodity because of its scarcity. Experienced pilots and flight attendants tend to be costly due to the regularly need for them to be trained.

  1. In this essay, a comparison between monopoly and perfect competition will be given firstly. ...

    In this sense, firms may take lots of lawyers and public relations specialists to lobby or even bribe politicians rather than devote to the development of production or services. Costs therefore will drift upwards and resources are wasted. It also can be argued that there are some advantages and potential benefits of monopoly.

  2. What is economic efficiency?

    If two methods of transport, train and taxi, yield the same amount of customer satisfaction, but the train costs half as much to produce and run as the taxi, it would be allocatively efficient to provide the train service in preference to the taxi.

  1. Briefly outline some of the main models of oligopoly in which firms compete according ...

    If the price is �73 per unit, the total demand is Q=40. As firm B is supplying 20 units, firm A will supply Qa= Q- Qb = 40 - 20 = 20. At this point the pair are in Cournot equilibrium.

  2. Perfect competition versus Monopolistic competition

    As the situation turns better, the price of the chicken meat will increase due to the scarcity of chicken meat producers. It is a repetitive step in perfect competition, as price increases, suppliers will increase and therefore price will fall back to the original place.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work