ASSIGNMENT IN ECONOMICS

Market structure is best defined as the organizational and other characteristics of a

market. We focus on those characteristics which affect the nature of competition and pricing
but it is important not to place too much emphasis simply on the market share of the
existing firms in an industry. Traditionally, the most important features of market structure
are: Number of Buyers, Number of sellers, Buyer Entry Barriers, Seller Entry Barriers, Size of
the firm, Product Differentiation/ Homogeneous Product, Market Share, Competition

1. describe the different market structures and provide a concrete

example of each
Monopoly
A monopoly is a firm that has no competitors in its industry. It reduces output to
drive up prices and increase profits. By doing so, it produces less than the socially
optimal output level and produces at higher costs than competitive firms.
- a market structure in which there is only one producer/seller for a product. In other
words, the single business is the industry. Entry into such a market is restricted due
to high costs or other impediments, which may be economic, social or political. For
instance, a government can create a monopoly over an industry that it wants to
control, such as electricity. Another reason for the barriers against entry into a
monopolistic industry is that oftentimes, one entity has the exclusive rights to a
natural resource.
- EXAMPLE: Companies which are state owned and entry for other players are not
allowed. If we take example from Indian perspective there is one example we can
think of is Indian railway which is the monopoly as there is no other contributor
exercising in the same market.
Oligopoly
An oligopoly is an industry with only a few firms. If they collude, they reduce output
and drive up profits the way a monopoly does. However, because of strong incentives
to cheat on collusive agreements, oligopoly firms often end up competing against
each other.
there are only a few firms that make up an industry. This select group of firms has
control over the price and, like a monopoly, an oligopoly has high barriers to entry.
The products that the oligopolistic firms produce are often nearly identical and,
therefore, the companies, which are competing for market share, are interdependent
as a result of market forces.
- EXAMPLE: In US and other countries people buy their automobiles from different
companies. Here the buyers are many, sellers are few, and competition is high.
Monopolistic Competition
In monopolistic competition, an industry contains many competing firms, each of
which has a similar but at least slightly different product.
- EXAMPLE: Look around your locality. There are some good numbers of restaurants
serving their customers. Though they might be producing same kind of recipes, the
branding would be different. And thats the catch of monopolistic competition. Many
buyers, many sellers, almost same product but different branding and fierce
competition.
Perfect competition
- Perfect competition happens when numerous small firms compete against each
other. Firms in a competitive industry produce the socially optimal output level at the
minimum possible cost per unit.
- characterized by many buyers and sellers, many products that are similar in nature
and, as a result, many substitutes. Perfect competition means there are few, if any,
barriers to entry for new companies, and prices are determined by supply and
demand. Thus, producers in a perfectly competitive market are subject to the prices
determined by the market and do not have any leverage.
- EXAMPLE: Though in concept perfect competition exists, however in real life only
near perfect competition can exist. And the staple food and vegetables we buy from
the market is perfect competition. However when they start branding they move
toward oligopoly.

In case of Monopsony and Oligopsony there are almost no practical examples

though they are just the opposite of monopoly and oligopoly respectively (buyers rule).
2. be able to illustrate through graphic organizer the different market
structures

Monopoly
-market dominated by one firm
-natural monopolies- utilities
-high barriers to entry
-pricing strategies to prevent
competition
-abnormal profit in short and long
run
-welfare losses

Oligopoly
-competition amongst the few
-high concentration ratio
-high degree of interdependence
-non-price competition
-homogenous or highly
differentiated goods
-possibility of collusion
-barriers to entry

Business Economics:
Market Structure

Monopolistic or Imperfect
Competition
-large number of firms
-product differentiation
-relative freedom of entry and exit
-imperfect knowledge
-D=downward slope
-long run equilibrium- not technically
efficient
-long run equilibrium- normal profit
-firms have some control over price

Perfect Competition
-large number of firms
-price takers
-homogenous products
-perfect information
-freedom of entry and exit
-no external costs or benefits
-long run- normal profit
-long run- costs minimized
-long run output at maximum
efficiency

3. how competition influences market behavior affects the way the market will
function in the long run.
In long run, if economic profits are earned, firms enter the industry, which increases the
market supply, causing the product price to go down. Until zero economic profits are earned,
then the supply will be steady. If losses are incurred in the short run, firms will leave the
industry which decreases the market supply, causing the product price to rise until losses
disappear. This model is one of zero economic profits in long run. The long run equilibrium is
achieved, the product price will be exactly equal to, and production will occur at, each firms
point of minimum average total cost.
Price exceeds marginal cost in the long run, suggesting that society values additional units
which are not being produced. Average costs may also be higher than under pure
competition, due to advertising cost involved to attract customers from competitors. The
various types, styles, brands, and quality of products offers consumers choices. However,
economic inefficiency is the result. The excess capacity (producing at the quality that a firm
produces is less than the quantity at which ATC is a minimum) exists in this industry.