Characteristics of the four market structures

Assignment 1: Characteristics of the Various Market Structures

The market structures influence how price and output decisions are made by the firms in their respective structure. In all market structures, one of the primary goals is to maximize profits or minimize losses.

One of the major differences between these market structures is how price and output decisions are made, which in turn depends on the characteristics of each market structure. There are four market structures:

1. Perfect competition

2. Monopolistic competition

3. Oligopoly

4. Monopoly

Required:

1. Using Template A , construct a table that describes the various characteristics of each market structure.

2. Identify a firm for each of these market structures and explain why each firm belongs in the market structure identified.

3. Using Microsoft Excel, construct a graph for each of the market structures and explain how price and output decisions are made in each structure and how they differ.

4. How is marginal analysis used in the price and output decisions of firms in the various market structures?

Template A:

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Number of Firms

Pricing Decisions

Output

Decisions

Profit

Demand Curve

Ease of Entry

Product Differentiation

Deliverables:

1. In a Microsoft Excel document, address each of the questions above, using text boxes for narratives. Explain your answers and use examples. Submit your document to the W4: Assignment 1 Dropbox by Saturday, June 21, 2014.

2. Create a 5-12 slide PowerPoint presentation that summarizes your responses to the above-noted questions. DO NOT include the table created in question 1. Post this assignment to the Week 4 Discussion Area by Saturday, June 21, 2014.

3. Comment on at least two other presentations submitted by your peers, identifying the strengths and weaknesses of each.

Hi Class,

As you respond to the characteristics of various market structures, please be sure to provide market concentration data using the Hirshman-Herfindahl Index and use practical examples and financial information from the respective industries.

Marlo

http://media.cheggcdn.com/media%2Fb61%2Fb61d886b-c0eb-4ba8-941b-67a1c70030c3%2Fphpc7Xn9G.png

http://media.cheggcdn.com/media%2Fb61%2Fb61d886b-c0eb-4ba8-941b-67a1c70030c3%2Fphpc7Xn9G.png

http://economicsonlinetutor.com/perfectcompetition.html

We know that all firms will maximize profits at the output level where mr=mc . In the real world, firms operate in a large variety of environments. These different environments, based on different market conditions, influence the behavior of different firms in different ways. In order to analyze this real life behavior, economists have identified characteristics that make some firms similar to each other, and other firms different from one another. This has led to the study of firms based on four categories of market structure: perfect competition, monopolistic competition, oligopoly, and monopoly. The characteristics of each market structure relate to differences in the demand curves faced by firms in each category. The identifying characteristics for each type of market structure include the number of firms in the industry, whether the products are identical (homogeneous), ease of entry for new firms in the industry, and the power that the firm has to influence the price of its products. The following table summarizes the characteristics of the four types of market structure:

MARKET STRUCTURE

NUMBER OF FIRMS

TYPE OF PRODUCT

ENTRY INTO INDUSTRY

FIRM'S INFLUENCE OVER PRICE

EXAMPLES

PERFECT COMPETITION

MANY

IDENTICAL

EASY

NONE

AGRICULTURAL CROPS

MONOPOLISTIC COMPETITION

MANY

DIFFERENTIATED

EASY

MODERATE

MANY LOCAL RETAIL OUTLETS

OLIGOPOLY

FEW

EITHER IDENTICAL OR DIFFERENTIATED

DIFFICULT

MODERATE TO SUBSTANTIAL

AUTOMAKERS

MONOPOLY

ONE

UNIQUE

IMPOSSIBLE

SUBSTANTIAL

LOCAL UTILITY

PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY MARKET FAILURE

Perfect competition and monopoly are extremes at the opposite ends of the competitive spectrum. Most real world firms have characteristics that more closely resemble the monopolistic competition and oligopoly models. For each of these four models of market structure, i have included a section which explains some of the details that distinguish one market structure from the rest. You can jump to each of these sections by clicking on the corresponding link. Besides the above table, which identifies the characteristics of each market structure, the following summary of conclusions from the details of each section should be helpful:

Perfect competition is the market structure that maximizes efficiency, as determined by total surplus. Perfect competition gives consumers more total output at a lower price than other market structures. Firms produce where P=MR=MC, which is at minimum average cost. Advertising is non-existent, since products are identical in the minds of consumers. The only competition is price competition, yet each firm is a price taker. Ease of entry and exit means that all firms will earn normal, not economic, profits in the long run. Monopolistic competition : differentiated products allow for more consumer choices than perfect competition. Higher prices and lower total output result in less efficiency than perfect competition. Firms do not produce at minimum average total cost. However, this lower efficiency results from consumer preference for more choices, not from economic profits. In the long run, economic profits do not exist. Advertising is an important part of product differentiation. Oligopoly : more than one model is needed to explain the behavior of firms in an oligopoly market structure. Non-price competition can be fiercer than any other market structure; on the other hand, anti-competitive cooperation may exist. Advertising is an important part of competition. So is research and development. Oligopoly is the market structure most responsible for technological advances. Price is above mc, and long run economic profits are possible as long as entry is restricted. Monopoly : with only one firm in the market, consumers are not given a choice of products. A monopolist has market power, and will set its output at the quantity where MR=MC, which is a lower quantity than the quantity under perfect competition, where MR=demand. At the same time, a monopolist will set its price where the MR=MC quantity equals demand, which is a higher price than perfect competition, where P=MC. With monopoly, advertising and innovation are unnecessary. Long run economic profits are possible.

http://www.scribd.com/doc/61250873/Lesson-11-Market-Structures

Book: http://online.vitalsource.com/books/9781305217171 Principles of Economics, 7th Edition