Introduction
In general, every firm possesses a specific market structure, which is mainly determined by the number of buyers, number of sellers, ease of entry or exit, and the degree of product differentiation (Arnold, 2010). The underlying determinants give rise to four types of market structures. These include perfect competition, monopoly, monopolistic competition, and oligopoly.
The short-run and long-run equilibrium for firms in a perfect competition industry is considerably different. Both short-run and long-run revenue data for a wheat farmer have been shown in table 1 and table 2 respectively.
In the long-run, it is assumed that the entry of new firms will only affect revenue as opposed to costs (O'Connor, 2004). Thus, new entrants will cause a downward shift in wheat farmer’s demand curve from a point at 40 to a point at 30 in long-run.
Short-Run Equilibrium
Long-run equilibrium
The analysis of the global shoes industry (where the wheat farmer operates) reveals that the firms in this industry enjoy supernormal profits in short-run (graph 1), which are, however, eliminated in long-run. This can be view on graph 2 where the demand (AR) curve for the farmer touches its ATC curve at its lowest point. This largely because; in long-run, more firms often enters the industry being incentivized by the huge profits earned by the existing firms. Besides, the entry of more firms is fueled by the lack of barriers to entry. In entry of more firms the long-run generally tends to lower the market price as market supply increases (assuming demand remains constant). Either in long-run or short-run, the profit maximization point for wheat farmer is achieved at a point where P=MR=MC=D. However, in long-run, P=MR=MC=ATC=D.
Monopoly (Microsoft Windows)
Microsoft has historically enjoyed some degree of monopoly power given that no other company manufactures the windows operating systems. For a monopoly like Microsoft window, the short-run and long-run equilibrium is arguably the same. With high the high level of technological barriers to entry, the company has been enjoying supernormal profits both in long-run and short-run bases. Given that the firm’s decisions are independent of other firms, the equilibrium conditions may be the same for both short-run and long-run (Jain & Khanna, 2008). As such, Table 3 shows the costs and revenue data sets for the company both in short-run and long-run.
It is assumed that since Microsoft windows have no close substitutes, the firm will continue with its price and production policies both in short-run and long-run. Whether in short-run or in long-run, the profit maximization point of the monopoly remain unchanged at point where MR=MC. In the above data, it can be argued that Microsoft windows’ profit maximization level of output is between 30 and 40 units (this is where the firm’s MR curve meets its MC curve). At this point, the company will charge a price level equal to the prevailing market demand (AR) that ranges between 83-90 units. In the above case, the total profit will be equivalent to the different between Microsoft window’s AR and AC multiplied by the equilibrium price {P=Q (AR-AC)}.
Monopolistic Competition (Nike Shoes)
In general, a monopolistic competition market structure integrates features of the two extreme market structures (monopoly and perfect competition). A critical analysis of the monopolistic competition industry, where Nike shoes operates reveals the following. First, there are many buyers and sellers owing to the lack of barriers to entry. Besides, it is apparent that Nike Shoes is a price maker. Characterized by perfect knowledge about the market, the company makes its own pricing decisions. However, as an attempt to achieve competitive advantage, Nike Shoes sells highly differentiated products from its close rivals. Moreover, faced by a downward sloping demand curve, the Nike Shoes competes fiercely with other firms and engage in advertisements to promote its products. In order to demonstrate the short-run and long-run equilibrium of the Nike Shoes, the following data on table 4 and table 5 can be utilized.
In the short-run, a monopolist competitor enjoys supernormal profits just like a monopoly. In the above figure, Nike Shoes maximizes its profits at a point where MR=MC. This is shown (above) at a point where the marginal revenue curve meets the marginal cost curve. The corresponding quantity (between 500-600 units) is the equilibrium output level. Besides, the corresponding demand (AR) of 76-80 forms the firm’s price level in short-run. Here, the supernormal profits enjoyed in short-run can be computed as equilibrium quantity multiplied by the different between AR and ATC.
In the long-run, the Nike Shoes still produces at a point where MR=MC. However, the entry of new firms (competition) makes the individual firm’s AR-curve to shift backwards until it forms at tangent with the ATC-curve. Here, Mike Shoes no longer produces above its average costs, and the firm no long claims any economic profits.
Oligopoly (Anheuser-Busch)
The Anheuser-Busch company operates in an industry characterized by very few players, and there are barriers to entry that restricts other firms from entering the market. Just like a monopoly, evidence reveals that Anheuser-Busch (a typical oligopoly) makes its own pricing decisions. However, the firms have to compete for demand using non-price wars such as promotions (Gitman & McDaniel, 2009). Since the reaction curve of firms is interdependent, Anheuser-Busch Company faces two sets of demand curves. In order to illustrate this concept, it is vital to plot the company’s costs and revenue data (collected over time) shown in table 6. These include a combination of both short-run and long-run data.
Initially, Anheuser-Busch Company faces a fairly elastic demand curve shown by the first section of the AR-curve. If the company tries to attract more customers by reducing its price level, other firms will also reduce their price. This implies that the demand for increase Anheuser-Busch’s products will not increase proportionately give that the demand curve past the kinked part is inelastic. Therefore, Anheuser-Busch will always operate at the kinked-part both in short-run and long-run. The company’s equilibrium price and quantity will be 120 and 40 units respectively.
References
Arnold, R. A. (2010). Microeconomics. Mason, OH: South-Western Cengage Learning.
Gitman, L. J., & McDaniel, C. D. (2009). The future of business: The essentials. Mason, OH: South-Western Cenage Learning.
Jain, T. R., & Khanna, O. P. (2008). Business economics. New Delhi: V K Publications.
O'Connor, D. E. (2004). The basics of economics. Westport, Conn: Greenwood Press.
