Market_Structure

Running head: DIFFERENTIATING BETWEEN MARKET STRUCTURES Differentiating Between Market Structures Michelle Ihegborow, Lauren Lovato, Araceli Pedraza, & Ginger Ramsay University of Phoenix ECO/212 Ted Nordin March 11, 2010 Differentiating Between Market Structures | |Perfect competition |Monopoly |Monopolistic Competition |Oligopoly | |An example of an organization |Corn Farmer |Microsoft |Coca Cola |Marlboro | | |Upper Mid-West, US |Corporation | | | |Goods or services produced by the |Corn |Windows Operating |Soft drinks and beverage products |Cigarettes | |organization | |System | | | | | |Windows Office | | | | | |Software | | | |Barriers to entry |No Barriers |Yes |No Barriers |Yes | |Numbers of organizations |Numerous |One |Numerous |Few | |Price elasticity of demand |Price-taker |Price maker |High Elasticity |Can be relatively elastic | | | | | |or relatively inelastic | | | | | |depending on the price | | | | | |curve. | |Economic profits: Is there a presence|Yes, temporary economic profits can |No their profits are| Yes, there are economic profits in the |Yes | |of economic profits' (Yes or no) |be made. No sustained economic |not unlimited |short run. No, there are not economic | | | |profits. | |profits in the long-run | | Private goods, public goods, common resources, and natural monopolies are the four categories that goods are grouped in after determining if the good is excludable or rival in consumption. The break down of a market consists of monopolies, oligopolies, perfect competition, and monopolistic competition. According to Mankiw (2007), public goods are neither excludable nor rival in consumption. Examples of public goods are national defense and fire alert system. Public goods are goods that can be used by one person without reducing another person’s ability to use it. Private goods are both rival in competition and excludable; meaning that one person’s use of the good reduces another person’s ability to use the good. An example of a private good is clothing because if one person is wearing an item of clothing, then another person is not able to wear it. Common resources are rival in consumption, but excludable, which means that one person’s use of it does reduce another person’s ability to use it, but people can be restricted from using it on the basis of ability to pay the price. An example of a common resource is a congested toll road because any person who can pay can use the toll road, but when there are many people on the road, it leaves less space for another person to use it. Natural monopolies are excludable, but not rival in consumption, meaning that people can be restricted from using it, but one person’s use of it cannot reduce another person’s ability to use it. An example would be cable TV because people have to pay for it to receive it, but if one person has cable; it doesn’t prevent others from acquiring cable as well. Equilibrium wage occurs when market wage and profit-maximizing quantity are at a level of optimal point of efficiency. Shifts in these curves change the labor market equilibrium. Shifts in the labor demand curve are caused by output price, technological change, and the supply of other factors. Output price is an increase or decrease in the price of the firms’ product. Changes affect a firms’ ability to hire workers and may cause a firm to lay-off workers. Shifts in the supply curve are caused by the household trade-off between leisure and work. The labor-supply curve shifts whenever people change the amount they want to work at a given wage (Mankiw, 2007). Changes in tastes, changes in alternate opportunity and immigration affect the labor supply curve. Any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal (Mankiw, 2007). Microsoft Corporation is the most common monopoly organization that everyone would be familiar with because it saturates the market. Microsoft is the company that designed Windows operating system for computers. Many years ago Microsoft reserved the right to be the only company to sell Windows operating system and Windows Office software by receiving a copyright from the government. Reserving the right to be the only company, customers have little choice but to pay the company generated price. A monopoly such as Microsoft has no close competitors and therefore, can influence the market price of its product (Mankiw, 2007). A monopoly can set the price of its output. Microsoft can sell Windows Office software at an expensive price but consumers would buy fewer computers or invest in a competing operating system that runs different software, like Macintosh or Unix, which can be beyond capabilities of consumer capabilities. However, without buying alternative hardware the consumers can only buy Microsoft Office software. As a result, the monopoly has to accept a lower price if it wants to sell more output (Mankiw, 2007). A monopoly is a firm that has no close substitutes to the product that is sold. Monopolies have three barriers to entry. The first barrier is a key resource owed by a single firm such as water well. The second barrier is to produce a good or service with an exclusive right from the government; an example is anything that has patent or a copyright. The third barrier is natural monopoly that occurs when a single firm can supply a good or service to an entire market at a lower cost than two or more firms (Mankiw, 2007). Monopolies are price makers. Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost therefore, a monopoly then chooses the price at which that quantity is demanded (Mankiw, 2007). In a perfectly competitive market a Midwestern, corn farmer produces corn identical to all other firms in the corn market, which are numerous. The corn farmer must accept or reject the market price demanded in the corn market. No single farmer can affect the market price. Each seller can sell all he wants at the going price, he has little reason to charge less, and if he charges more, buyers will go elsewhere (Mankiw, 2007). Anyone with access to capital and land can enter the corn market. Economic profits are temporarily in a perfect competition because there are no barriers to entry. Therefore, any improvement in technology will quickly be market wide. The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue (Mankiw, 2007). According to Mankiw (2007), monopolistic competition has similarities to both monopolies and perfect competition. Monopolistic competitive markets, like perfect competitive markets, have many firms and there are no barriers for new firms to enter the market. Monopolistic competitive markets, like monopolies, charge prices that are above marginal costs because they are confronted with demand curves that slope downwards. Firms in a monopolistically competitive market produce similar products; the price elasticity is very high. Firms in monopolistic competitive markets tend to use advertising to promote their brands and products; an example of this would be Coca Cola advertising their soft drinks and beverages in an attempt to stand out in a market that contains numerous companies that produce similar products. When firms in a monopolistic competitive market are making profits, there is an incentive for new firms to enter the market. When new firms enter the market, offering similar products, this decreases the demand for products from each firm that is already in the market. As demand decreases for firms’ products, the firms experience a decline in profits. An oligopoly is a market structure in which only a few sellers offer similar or identical products. Oligopoly is a type of an imperfectly competitive market. An example of an oligopoly is Marlboro. Oligopolies care only about their own profits therefore there are powerful incentives at work that hinder a group of firms from maintaining a monopolistic outcome (Mankiw, 2007). Oligopolies want to act like monopolies, but self-interest drives them closer to competition (Mankiw, 2007). Cigarette companies produce only cigarettes. Only a few organizations produce this type of good with no barriers to entry but it would be hard to top Marlboro, Newport, Winston, or Pall Mall. A presence of economic profits exists because there are few producers of this good and the price of this good keeps increasing. Goods differ whether they are excludable or rival in consumption. A firm’s goal is to maximize profits. They accomplish this by choosing a quantity of output such that marginal revenue equals marginal cost, its supply curve. A monopoly arises when a single firm owns a key resource (Mankiw, 2007). A monopoly is the sole producer in its market, therefore facing a downward sloping demand curve for its product. Competitive firms are price-takers therefore the price of the good equals both the firm’s average revenue and its marginal revenue (Mankiw, 2007). A monopolistic competitive market does not have all the desirable properties of a perfect competitive market and it is characterized by many firms, differentiated products, and free entry. This leads to the use of advertising and brand names. Oligopolies maximize their profits by forming a cartel and acting monopolistic because their self-interest drives them closer to competition. Depending on the number of firms in the oligopoly and how cooperative the firms are oligopolies can also look like competitive markets (Mankiw, 2007). Reference Mankiw, N. (2007). Principles of Economics (4th ed.). Mason, OH: Thomson Learning, Inc.