Free Markets Essay Sample

1. Fixed costs are costs that are not directly changed by increasing or decreasing the scale of production in the short term. They take a place even in the case when the company produces nothing, that is, their value does not depend on production volume. The types of fixed costs: depreciation, rents, costs of capital repairs, the percentage of the loan for the purchase of equipment, payment of taxes, insurance premiums, administrative expenses etc. On the other hand, variable costs are such costs, the value of which directly depends on the scale of production. The types of variable costs are wages, cost of raw materials, the cost of fuel and lubricants, energy costs etc.
2. Pure competition suggests that there are a very large number of firms producing a standardized product (e.g. wheat or maize) and new firms can easily enter the industry. This market model is the idealized state of the market, where individual buyers and sellers cannot influence the price, but shape it with their contribution of supply and demand. In other words this is the type of market structure, where market behavior of buyers and sellers is adapted to an equilibrium state of market conditions.
3. Monopolistic competition is characterized by a relatively large number of sellers producing differentiated products (clothing, furniture, books). Differentiation is the basis for the creation of favorable conditions for sale and product updates. Enter the sector with monopolistic competition is quite simple. Examples of monopolistic competitors are small networks of shops, restaurants, market, network communication and similar industries. Monopolistic competition is similar to the situation of a monopoly, because individual firms have the ability to control the price of their goods. It is also similar to pure competition because every product is sold by many firms and the market there is free entry and exit.
4. Oligopoly is a market structure in which the realization of any goods is dominated by very few sellers, and the emergence of new sellers is difficult or impossible. The main feature of oligopoly is that the number of firms is so small relative to the size of the market that each of the firms recognizes the close relationship with each other. Since there is a universal interdependence, the oligopolistic firm receives marginal revenue, setting a higher price, depending on the reaction of competing firms. If their response is not provided, then the oligopolistic firm will not get marginal revenue.
5. Pure monopoly is a market situation in which there is only one seller and there are no close substitutes of the product which he produces. This seller is not under any influence and does not affect prices and production of other products. Pure monopoly usually arises where there are no real alternatives, no close substitutes, a product that is made is somewhat unique. This fully can be attributed to natural monopolies, when the increase in the number of firms in the industry causes an increase in average costs. A typical example of natural monopolies is utilities. In these circumstances, a monopolist has power over the product, largely controls the price and can influence it by modifying the quantity of an item.
6. Profit maximization for the firm means finding ways to get the highest economic profit, i.e. the difference between total income and total costs.
Since in this market structure the share of each firm in total output is very small, the equilibrium price prevailing in the market, for it is determinative and not subject to control. These firms are price takers; hence, they sell their products at prices established under the influence of forces that are external to the firm and inaccessible to her influence. In these circumstances, the firm can only make decisions about the regulation of the volume of production to ensure maximum profit and minimal costs.