Question

1- What is a market structure?

2- Name the four product market structures and explain them briefly with examples.

3-How do firms decide how much to supply? Determine profit maximization using MR = MC rule.

Answer 1

1. The Market Structure refers to the market characteristics, whether organizational or competitive,which define the essence and degree of cometition within goods and services market. Market structure for both the market in products and services(factors) market are determined by the existence of competition prevailing in a given market. Market structure determines how strongly firm priced and distributed their goods and srvices, how barriers to exit and entry are managed and how effectively a comapany performs his business operations.

2. Four Market Structures are-

(a) Perfect Competition

(b) Monopoly competition

(c) Monopolistic competition

(d) Oligopoly Market

Explanation of the above four market structures as follow -

(a) Perfect Competition:

Perfect competition is a market structure characterized by a complete absence of competition among the individual firms. This market structure is an ideal market logically. In this market there is no barrier in the entry and exit of firms, so any firm can freely entry in this market and also exit when its not profitable. Buyers and sellers can not influence the price, so they are price takers because of large numbers of buyers and sellers in the market. The goods within the market are seen as homogenous, the variation between them is minimal. All buyers and sellers have complete knowlegde of market condition.

Example: A notable example is the dairy. Most farmers,for example, sell milk to supermarkets but the product is very similar. Supermarkets actually change contarcts with dairy producers,without even knowing customers.

2. Monopoly competition :

There is only one company in the industry in a monopoly situation and there are no close competitors for the monopolist's product. Monopolist's demand curve coincides with the industry demand curve, which has fixed price elasticity and here entry of firm is blocked. Monopolist has the power to decide the market price.However it does not mean that he can set both output and price. He can only do either of the two things, if he selects his output level, his price is determind by its demand curve which is downward sloping or once price of his commodity has been set, its output is determined by what buyers can take that price. In any case the monopolists ultimate goal is to maximize profit.

Examplre: However, it does not mean that he can set both price and output. He can do either of the two things. His price is determined by his demand curve, once he selects his output level. Or, once he sets the price for his product, his output is determined by what consumers will take at that price. In any situation, the ultimate aim of the monopolist is to have maximum profits.

Example: Patents provide a Corporation with a legitimate monopoly, albeit for a short time. No other Organization can use its invention for its own purposes during the time the patent is in effect. Malaysia, a casino in Genting Highlands, owned an exclusive patent for legalized casino, and enjoyed the legal monopoly in Malaysia for years.

(c) Monopolistic Competition:

There is a very large number of companies in a market with direct competition but their commodity is somewhat distinguished. Thus the individual company's demand has a negative slope, but its price elasticity is high due to the existence of the near substitutes generated by the other companies in the field. Notwithstanding the presence of near substitutes each company behaves atomistically, ignoring the reactions of the competitors, because there are too many of them and each would be very little influenced by any other competitor's actions.So each seller thinks that if he increases his price he will retain some of his buyers, and he could increase his profits, but not much, if he lowered his price: his de-mand curve has a high price elasticity, but is not completely elastic because of the customers ' attachment to the slightly differentiated product that he offers. Entry in the industry is safe, and simple.

Example: Support and repair services industries such as HVAC repair firms

(d) Oligopoly Market:

There are a small number of firms in an oligopolistic market, and sellers are mindful of their interdependence. Therefore each firm has to consider the reactions of the rivals. The market is not ideal, yet there is high rivalry between companies, unless they make a collusive contract. The products generated by oligopolists can be homogeneous (pure oligopoly) or differentiated (differentiated oligopoly).

Example : pure oligopolies of homogeneous products, such as the petrol industry. Some companies operate in differentiated oligopolies; selling products with small differences, such as fast food or air transport.

3. When Marginal Cost curve cut Marginal revenue curve from below that point decide the amount of suppy, where MC=MR and firms maximize their profit at this quantity of output. And after cutting MR curve from below MC must be rising. This is point that is MC=MR firms decide the amount which he is going to sell. This is can be profit maximizing rule