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
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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.
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.
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.
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