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 essay...

Introduction

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.

Middle

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.

Conclusion

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.

The above preview is unformatted text

Found what you're looking for?

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

Not the one? Search for your essay title...
  • Over 180,000 student essays
  • Every subject and level covered
  • Thousands of essays marked by teachers

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 ...

    Under the assumption of zero conjectural variation, as time passes, duopolists tend towards a market equilibrium level. This is due to each firm basing their supply decision upon the last known output by their competitor. As an example consider a new entrant into a market.

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

    The graph below plots firm A's best response curve, which shows how great a quantity firm A supplies for each possible Qb. Firm A will shut down and provide nothing (Qa=0) if it believes that firm B will provide Qb = 60.

  1. Benetton Group: The evolution of a network to face global competition.

    Benefits offered by megastore retailing include 2-3 times more turnover per m2 and increased ability to monitor consumer preferences. Benetton have also invested in a new information system which records details of all sales worldwide and allows Benetton to view market trends in real-time.

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

    The second form of barriers to entry is that the costs of production make a monopoly firm more efficient than other producers. In some cases, it can be also explained as a monopoly has economies of scale. The last type is that a monopoly firm may get key resources which are no close substitutes.

  1. Free essay

    Analysis of market structure in the airline industry.

    This relates to the airline industry as the five alliances as stated in the above illustration with the largest market share will be able to keep their existing power over the airline business. Barriers to entry in the airline market include high set up costs, legal requirements, brand loyalty and economies of scale.

  2. Perfect competition versus Monopolistic competition

    End up producer gain zero economic profit in this scenario. Economic slump can occur within the period of some disasters such as bird flu. During the attack of bird flu, people are deterred from eating the chicken meat. Therefore, consumers in market will start seeking for other substitutes such as lamb, beef and etc.

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

    It is implied that shareholders possess the desire of profit maximization to be the preferable target of any business with which they hold equity, thus providing them with more wealth. However in practice this is not always the case as the debate over the divorce of ownership and control comes into play.

  2. Explain what supply and demand curves indicate. Show how they can be used to ...

    you know the price of a certain product will rise, you will want to buy more now, so that you can avoid paying the higher price in the future. So demand will increase in response to this information. Likewise, if you know the prices will drop, you are likely to

  • Over 180,000 essays
    written by students
  • Annotated by
    experienced teachers
  • Ideas and feedback to write
    your own great essays

Marked by a teacher

This essay has been marked by one of our great teachers. You can read the full teachers notes when you download the essay.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review on the essay page.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review under the essay preview on this page.