Eco 204 Week 5 Research Paper
Week 5 Final Paper
Derrick Grant
ECO 204
Instructor: Felix Telado
5/03/2015
Introduction:
There are four different model types which are referred to as market structures and consist of sellers and buyers, all of which drive our economy and workforce here in America and around the world. Describe each market structure discussed in the course (perfect competition, monopolistic competition, oligopoly, and monopoly) and discuss two of the market characteristics of each market structure.
Perfect competition is the situation in a market (based on six assumptions), (1) where the elements of a monopoly are non-existent, (2) consisting of numerous buyers and sellers, (3) the market price of commodities are beyond the control of individual sellers and buyers, (4) perfectly competitive firms produce homogeneous products, (5) there is free entry into the market and free exit out of the market, and lastly (6) there is perfect knowledge. If these six assumptions are met, the market will be perfectly competitive. Monopolistic competition describes a marketplace consisting of a great number of sellers offering a differentiated product, which …show more content…
basically means the good or service being sold, has real or imagined characteristics different from those of other goods and services. Examples of monopolistic competition can be found in restaurants, shoes, cereal and other retail firms. In the short run, economic profit can be gained, because the firm maximizes its profits and produces a quantity where the firm’s marginal revenue is equal to its marginal cost. These profits can cause new firms to enter the industry. Long-run equilibrium in a monopolistic competition occurs when firms are making zero economic profit or normal profit.
An oligopoly is an industry dominated by a small number of sellers with market power. In this market structure, its similar to a monopoly, being that instead of only one company exerting control over the majority of the market, there’s at least two firms with control of the market. The gas industry is an example of an oligopoly being that there’s only a small number of firms that controls the majority of the gas market. Oligopolies have the ability to limit or discount competition, and earn excess profits, because they set market prices for their goods or services. Oligopolies consist of three main characteristics, the first and most important being that it’s an industry dominated by a small number of big firms, each of which are considered large compared to the total size of the market. Secondly, oligopolistic industries generally come in two varieties: 1. Identical product oligopoly, which produce intermediate goods or raw materials such as the petroleum, beer and steel industries. 2. Differentiate product oligopoly, which tends to sell goods specifically for consumption such as household soaps or laptops. The last characteristic of an oligopoly is barriers to entry. Oligopolistic firms gain and retain control of the market by way of barriers to entry, which may consist of resource ownership, government restrictions, high start-up costs, and patents/copyrights. These characteristics are what separates oligopoly from monopoly competition. It is safe to say that for an oligopoly, regardless of the demand curve, profits are possible in the long-run because of the difficulty it takes to enter the industry.
Monopolies are market structures in which there is only a single seller of a certain product and they are also known for their market power ( prices can be increased without losing any of their customers). There are four main characteristics of a monopoly, they are 1. A single supplier - the organization becomes the one and only provider of a good or service, giving a greater control over the production of quality. 2. Specialized information - the company has complete control over the market by using special information that’s only available to that firm. 3. Unique product - control over the market by offering a product or service unlike any other. 4. Barriers to entry - barriers can come in different forms, structural, strategic, artificial, government and statutory. According to Amacher & Pate, “These are obstacles that are put in place to keep new firms from entering an industry and without them, a monopoly cannot continue.” (Amacher & Pate, 2013).
Identify one real-life example of a market structure in your local city and relate your example to each of the characteristics of the market
Our local Denny’s restaurant is a real-life example of a monopoly here in my city. There are many restaurants in my neighborhood for consumers to choose from, thus the restaurant can set its own prices, but at the same time have to keep their prices in line with other competing restaurants in order to prevent customers from leaving and going elsewhere. Restaurants compete with one another for consumers’ dollars spent on eating, but not by selling the exact same products (different ingredients, different menus, different settings, etc.), although they will set their prices in line with other competing restaurants so that they will not lose customers, which in turn could result in a decrease of profits made.
Describe how high entry barriers into a market will influence long-run profitability of the firms.
When entry barriers are high, it will more than likely have a long-term positive impact on the firm, which adds to its value. Most countries have their own set of rules and regulations.One such regulation is patent law (a legal barrier), which protects and preserves the interests of inventors and innovators concerning their invention or idea created. Under this law, no firm other than the patent holder or the licensed firm is allowed to make use of the process and product. High entry barriers are found mainly in oligopolies and monopolies. High entry barriers into a market for each of the different markets are as follows:
1.
Perfect Competition: Zero barriers to entry.
2. Monopolistic Competition: Low barriers to entry.
3. Oligopoly: High barriers to entry. Economies of scale, which basically means that any of these could be necessary to enter an industry; natural, artificial, and governmental barriers.
4. Monopoly: Very High to Absolute barriers to entry. The government regulates their prices and output levels, while also regulating foreign firms by putting in place, tariffs and quotas, which serves as an artificial barrier to entry by increasing the price on foreign goods. With high entry barriers, the federal, local, and state governments jointly may restrict entry, while ensuring protection of certain market positions already in place.
Explain the competitive pressures that are present in markets with high barriers to
entry.
Monopolies rarely face competitive price pressures. Barriers to entry are almost always present to a new firm in the very nature of things, either some fee or investment is always required to get the firm up and running, however minimum the cost may be. Oligopolies are way more price associated, meaning that the price or product offered by a fellow oligopoly, will influence what the market should expect to be offered by all other oligopolies within that market. For example, the recent service shift of U.S. Internet providers, away from offering its services by way of cables to offering its services by way of satellites (wireless). This eliminated the cost needed for purchasing any more cables (raw materials), which resulted in greater profits for the firms within that market. Competitive pressures that are present in markets with high barriers to entry can include greater marketing and financial resources, higher levels of competition which could limit the ability to maintain or increase gross margins, and also could experience significant pressure from clients/customers to reduce prices. For instance, if and when new suppliers come into the market, existing firms may put up tactical barriers by cutting prices to inflict losses on new firms, protecting their own position within the marketplace for the long run.
Explain the price elasticity of demand in each market structure and its effect on pricing of its products in each market.
According to Wei, “Price elasticity of demand measures how much, in terms of percentage change, the quantity demanded responds to a change in price.” (Wei, 2013).
In a perfect competition, it’s known for its perfectly elastic demand curve. These firms will make zero economic profits (normal profits) in the long run. Monopolistic competition produces an equilibrium with zero economic profits, but in the short-run an economic profit can be created. This type of market is known for its ability to set price by differentiation of a firms product (only substitutes exist). In an oligopoly, non-price competition increases product differentiation and is known for having a kinked demand curve. According to Amacher & Pate, “An important factor in determining price elasticity of demand is the number of substitutes a good or service has” (Amacher & Pate 2013). By lowering prices, this would force the other firms to follow suit, which in turn, would lower prices for all. With monopolies, they have an inelastic price elasticity of demand. This basically means that an increase in price will result in a decrease in demand. Also with monopolies, the firm faces the market demand curve and being that the firm is the single seller, this also means that the firm is the market.
Describe how the role of the government affects each market structure’s ability to price its products.
Government will more than likely not bother and leave alone, a perfect competition (if it exist). When it comes to monopolistic competition, it’s often regulated by government for supply and for price (which can be yielded negotiated profits). An oligopoly can exist in a market controlled by a government who wants to ensure supply and income structure within that market. Government regulations are put in place to keep competition and the freedom of entry into the market for smaller companies. If one company was to control all of the market share, smaller firms would never be able to enter that particular market and grow. In monopolies, the customers rely on regulators in government to protect their interest both strategically and nationally. Important consideration should be with the price elasticity of demand for imported products.
Discuss the effect of international trade on each market structure.
According to Lorz & Wrede, “Production of manufacturing goods requires specific intermediate inputs, which can be either specialized or standardized.” ( Lorz & Wrede, 2008). International trade enables consumers to purchase and consume goods that are not domestically produced or would be more costly to produce in their country. This also increases the number of competing firms within a market from whom consumers can purchase. This in turn, can widen the range of suppliers and goods.
International trade also brings with it, tariffs and quotas, which are both put in place to protect domestic industries. In a perfect competition, in the long run it will not have to worry about any new suppliers, also lower cost will exist for only their supply. Product differentiation comes with monopolistic competition, which is in their favor when it comes to international trade. Their competition enters the market with the intention of selling substitute products.
According to Barbour, "Anything that benefits small businesses and makes them stronger will have the effect of making the economy more stable" (Barbour, 2014). In an oligopoly, the effect of international trade plays a major role in this type of market. While reading “Piecemeal Oligopoly, Exchange Rate Uncertainty, and Trade Policy”, Mesa states that “the volatility of the domestic exchange rate leads governments to reduce export subsidies or to cut export taxes, according to the strategic variable chosen by firms.” (Mesa, 2009). Opening this type of market, including government created barriers, can bring about coordination within the firms of that market. Oligopolies are up against providers with superior economies of scale or subsidized pricing and offering greater supply. Monopolies facing international competition may lack protections from either the market itself or their government. Governments will drive the prices down until product differentiation is factored into the purchasing of products. A monopoly market that opens to international trade, will bypass the normal barriers to entry, which are considered to be problematic. Also, prices can be reduced by the expansion of supply at a lower cost by monopolies entering international competition. Products made elsewhere that are offered for a lower price than is being offered domestically, will gain government support. Different factors play a role in determining the products that different countries can readily produce, such as the climate and mineral resources. Some countries utilize a high number of unskilled labor similar to capital or other inputs. Outsourcing is also known to be a factor in the change of labor growth rates either positively or negatively. For example, a company that decides to take their firms overseas, may profit by cheaper labor, but for those people who were employed by that company here in the U.S., it would effect them in a negative way because they would have be out of a job.
Conclusion:
The four different model types which are referred to as market structures (perfect competition, monopolistic competition, oligopoly and monopoly) are what drives our economy and workforce here in America and around the world among other countries.
References:
- Barbour, T. (2014). US small business administration loan programs: supporting business start-up and growth. Alaska Business Monthly, (7). 34.
- Lorz, O., & Wrede, M. (2008). Standardization of Intermediate Goods and International Trade. Canadian Journal Of Economics, 41(2), 517-536.
- Amacher, R., & Pate, J. (2013). Microeconomics principles and policies. San Diego, CA: Bridgepoint Education Inc.
- Wei, J. (2013). On Teaching Price Elasticity of Demand and Change in Revenue Due to Price Change--A Synthesis with and without Calculus. International Journal Of Business And Economics, 12(1), 1-14.
- Mesa, F. (2009). Piecemeal Oligopoly, Exchange Rate Uncertainty, and Trade Policy. Revista De Economia Del Rosario, 12(2), 161-178.
Derrick Grant
ECO 204
Instructor: Felix Telado
5/03/2015
Introduction:
There are four different model types which are referred to as market structures and consist of sellers and buyers, all of which drive our economy and workforce here in America and around the world. Describe each market structure discussed in the course (perfect competition, monopolistic competition, oligopoly, and monopoly) and discuss two of the market characteristics of each market structure.
Perfect competition is the situation in a market (based on six assumptions), (1) where the elements of a monopoly are non-existent, (2) consisting of numerous buyers and sellers, (3) the market price of commodities are beyond the control of individual sellers and buyers, (4) perfectly competitive firms produce homogeneous products, (5) there is free entry into the market and free exit out of the market, and lastly (6) there is perfect knowledge. If these six assumptions are met, the market will be perfectly competitive. Monopolistic competition describes a marketplace consisting of a great number of sellers offering a differentiated product, which …show more content…
basically means the good or service being sold, has real or imagined characteristics different from those of other goods and services. Examples of monopolistic competition can be found in restaurants, shoes, cereal and other retail firms. In the short run, economic profit can be gained, because the firm maximizes its profits and produces a quantity where the firm’s marginal revenue is equal to its marginal cost. These profits can cause new firms to enter the industry. Long-run equilibrium in a monopolistic competition occurs when firms are making zero economic profit or normal profit.
An oligopoly is an industry dominated by a small number of sellers with market power. In this market structure, its similar to a monopoly, being that instead of only one company exerting control over the majority of the market, there’s at least two firms with control of the market. The gas industry is an example of an oligopoly being that there’s only a small number of firms that controls the majority of the gas market. Oligopolies have the ability to limit or discount competition, and earn excess profits, because they set market prices for their goods or services. Oligopolies consist of three main characteristics, the first and most important being that it’s an industry dominated by a small number of big firms, each of which are considered large compared to the total size of the market. Secondly, oligopolistic industries generally come in two varieties: 1. Identical product oligopoly, which produce intermediate goods or raw materials such as the petroleum, beer and steel industries. 2. Differentiate product oligopoly, which tends to sell goods specifically for consumption such as household soaps or laptops. The last characteristic of an oligopoly is barriers to entry. Oligopolistic firms gain and retain control of the market by way of barriers to entry, which may consist of resource ownership, government restrictions, high start-up costs, and patents/copyrights. These characteristics are what separates oligopoly from monopoly competition. It is safe to say that for an oligopoly, regardless of the demand curve, profits are possible in the long-run because of the difficulty it takes to enter the industry.
Monopolies are market structures in which there is only a single seller of a certain product and they are also known for their market power ( prices can be increased without losing any of their customers). There are four main characteristics of a monopoly, they are 1. A single supplier - the organization becomes the one and only provider of a good or service, giving a greater control over the production of quality. 2. Specialized information - the company has complete control over the market by using special information that’s only available to that firm. 3. Unique product - control over the market by offering a product or service unlike any other. 4. Barriers to entry - barriers can come in different forms, structural, strategic, artificial, government and statutory. According to Amacher & Pate, “These are obstacles that are put in place to keep new firms from entering an industry and without them, a monopoly cannot continue.” (Amacher & Pate, 2013).
Identify one real-life example of a market structure in your local city and relate your example to each of the characteristics of the market
Our local Denny’s restaurant is a real-life example of a monopoly here in my city. There are many restaurants in my neighborhood for consumers to choose from, thus the restaurant can set its own prices, but at the same time have to keep their prices in line with other competing restaurants in order to prevent customers from leaving and going elsewhere. Restaurants compete with one another for consumers’ dollars spent on eating, but not by selling the exact same products (different ingredients, different menus, different settings, etc.), although they will set their prices in line with other competing restaurants so that they will not lose customers, which in turn could result in a decrease of profits made.
Describe how high entry barriers into a market will influence long-run profitability of the firms.
When entry barriers are high, it will more than likely have a long-term positive impact on the firm, which adds to its value. Most countries have their own set of rules and regulations.One such regulation is patent law (a legal barrier), which protects and preserves the interests of inventors and innovators concerning their invention or idea created. Under this law, no firm other than the patent holder or the licensed firm is allowed to make use of the process and product. High entry barriers are found mainly in oligopolies and monopolies. High entry barriers into a market for each of the different markets are as follows:
1.
Perfect Competition: Zero barriers to entry.
2. Monopolistic Competition: Low barriers to entry.
3. Oligopoly: High barriers to entry. Economies of scale, which basically means that any of these could be necessary to enter an industry; natural, artificial, and governmental barriers.
4. Monopoly: Very High to Absolute barriers to entry. The government regulates their prices and output levels, while also regulating foreign firms by putting in place, tariffs and quotas, which serves as an artificial barrier to entry by increasing the price on foreign goods. With high entry barriers, the federal, local, and state governments jointly may restrict entry, while ensuring protection of certain market positions already in place.
Explain the competitive pressures that are present in markets with high barriers to
entry.
Monopolies rarely face competitive price pressures. Barriers to entry are almost always present to a new firm in the very nature of things, either some fee or investment is always required to get the firm up and running, however minimum the cost may be. Oligopolies are way more price associated, meaning that the price or product offered by a fellow oligopoly, will influence what the market should expect to be offered by all other oligopolies within that market. For example, the recent service shift of U.S. Internet providers, away from offering its services by way of cables to offering its services by way of satellites (wireless). This eliminated the cost needed for purchasing any more cables (raw materials), which resulted in greater profits for the firms within that market. Competitive pressures that are present in markets with high barriers to entry can include greater marketing and financial resources, higher levels of competition which could limit the ability to maintain or increase gross margins, and also could experience significant pressure from clients/customers to reduce prices. For instance, if and when new suppliers come into the market, existing firms may put up tactical barriers by cutting prices to inflict losses on new firms, protecting their own position within the marketplace for the long run.
Explain the price elasticity of demand in each market structure and its effect on pricing of its products in each market.
According to Wei, “Price elasticity of demand measures how much, in terms of percentage change, the quantity demanded responds to a change in price.” (Wei, 2013).
In a perfect competition, it’s known for its perfectly elastic demand curve. These firms will make zero economic profits (normal profits) in the long run. Monopolistic competition produces an equilibrium with zero economic profits, but in the short-run an economic profit can be created. This type of market is known for its ability to set price by differentiation of a firms product (only substitutes exist). In an oligopoly, non-price competition increases product differentiation and is known for having a kinked demand curve. According to Amacher & Pate, “An important factor in determining price elasticity of demand is the number of substitutes a good or service has” (Amacher & Pate 2013). By lowering prices, this would force the other firms to follow suit, which in turn, would lower prices for all. With monopolies, they have an inelastic price elasticity of demand. This basically means that an increase in price will result in a decrease in demand. Also with monopolies, the firm faces the market demand curve and being that the firm is the single seller, this also means that the firm is the market.
Describe how the role of the government affects each market structure’s ability to price its products.
Government will more than likely not bother and leave alone, a perfect competition (if it exist). When it comes to monopolistic competition, it’s often regulated by government for supply and for price (which can be yielded negotiated profits). An oligopoly can exist in a market controlled by a government who wants to ensure supply and income structure within that market. Government regulations are put in place to keep competition and the freedom of entry into the market for smaller companies. If one company was to control all of the market share, smaller firms would never be able to enter that particular market and grow. In monopolies, the customers rely on regulators in government to protect their interest both strategically and nationally. Important consideration should be with the price elasticity of demand for imported products.
Discuss the effect of international trade on each market structure.
According to Lorz & Wrede, “Production of manufacturing goods requires specific intermediate inputs, which can be either specialized or standardized.” ( Lorz & Wrede, 2008). International trade enables consumers to purchase and consume goods that are not domestically produced or would be more costly to produce in their country. This also increases the number of competing firms within a market from whom consumers can purchase. This in turn, can widen the range of suppliers and goods.
International trade also brings with it, tariffs and quotas, which are both put in place to protect domestic industries. In a perfect competition, in the long run it will not have to worry about any new suppliers, also lower cost will exist for only their supply. Product differentiation comes with monopolistic competition, which is in their favor when it comes to international trade. Their competition enters the market with the intention of selling substitute products.
According to Barbour, "Anything that benefits small businesses and makes them stronger will have the effect of making the economy more stable" (Barbour, 2014). In an oligopoly, the effect of international trade plays a major role in this type of market. While reading “Piecemeal Oligopoly, Exchange Rate Uncertainty, and Trade Policy”, Mesa states that “the volatility of the domestic exchange rate leads governments to reduce export subsidies or to cut export taxes, according to the strategic variable chosen by firms.” (Mesa, 2009). Opening this type of market, including government created barriers, can bring about coordination within the firms of that market. Oligopolies are up against providers with superior economies of scale or subsidized pricing and offering greater supply. Monopolies facing international competition may lack protections from either the market itself or their government. Governments will drive the prices down until product differentiation is factored into the purchasing of products. A monopoly market that opens to international trade, will bypass the normal barriers to entry, which are considered to be problematic. Also, prices can be reduced by the expansion of supply at a lower cost by monopolies entering international competition. Products made elsewhere that are offered for a lower price than is being offered domestically, will gain government support. Different factors play a role in determining the products that different countries can readily produce, such as the climate and mineral resources. Some countries utilize a high number of unskilled labor similar to capital or other inputs. Outsourcing is also known to be a factor in the change of labor growth rates either positively or negatively. For example, a company that decides to take their firms overseas, may profit by cheaper labor, but for those people who were employed by that company here in the U.S., it would effect them in a negative way because they would have be out of a job.
Conclusion:
The four different model types which are referred to as market structures (perfect competition, monopolistic competition, oligopoly and monopoly) are what drives our economy and workforce here in America and around the world among other countries.
References:
- Barbour, T. (2014). US small business administration loan programs: supporting business start-up and growth. Alaska Business Monthly, (7). 34.
- Lorz, O., & Wrede, M. (2008). Standardization of Intermediate Goods and International Trade. Canadian Journal Of Economics, 41(2), 517-536.
- Amacher, R., & Pate, J. (2013). Microeconomics principles and policies. San Diego, CA: Bridgepoint Education Inc.
- Wei, J. (2013). On Teaching Price Elasticity of Demand and Change in Revenue Due to Price Change--A Synthesis with and without Calculus. International Journal Of Business And Economics, 12(1), 1-14.
- Mesa, F. (2009). Piecemeal Oligopoly, Exchange Rate Uncertainty, and Trade Policy. Revista De Economia Del Rosario, 12(2), 161-178.