Microeconomics is a subtopic of economics that dwells on the behavior of individuals as they make decisions in light of scarce resources. The market activity includes selling and buying goods and services. Microeconomics elaborates decisions made by individuals due to supply and demand in the market to determine the quantity demanded, price of good or service, and the quantity supplied. Conversely, microeconomics entails all the economic activities that affect inflation, unemployment, inflation and growth in the country. Microeconomics highlights the national policies that affect the economy such as the change of the tax levels.
The branch of economics strives to analyze the market mechanisms in the allocation of scarce resources and relative price in the goods and services. The concepts perform analysis on the emergence of market failure as the markets fail to produce an efficient result describing the necessity for perfect competition. Some of the studies under microeconomics includes game theory, equilibrium, asymmetry information, and alternatives within uncertainty. The study assumes that an individual has a wide variety of choices in the purchase and sale of goods and services.
The study also assumes the transitivity in the bundle of choices to an individual. The assumption of perfect competition in supply and demand depict that both buyers and sellers do not have the capacity of influencing the prices of goods and services in the market. In reality, the assumption is false since in some market structures some individuals can influence the price of goods and services. A technical analysis calls for the understanding of economic models that show demand and supply curves. The assumption of a priori market preferred to other forms in the society translates to market failures and the allocation of scarce resources. Economists devote to identify policies that can reduce wastage through directly in governmental control or indirectly by applying regulation to create a missing market. This paper will focus on some of the market structures in the economic system. The paper will also mention the competitive pressure, price elasticity of demand, and the role of the government in each of the market structure.
Market structure depicts an organization with distinct attribute such as pricing and competition to affect the market share in the existing industry (Pindyck & Rubinfeld, 2008). Some of the features of the market shares include many firms to enable local and domestic competition, market share of a large firm measured using the concentration ratio, nature of costs, and degree of vertical integration, product differentiation, market churn, and the monopsony power of the buyers. A market structure can have several market systems that interact with each other.
The forms of the market systems vouch for socialism and capitalism as a critique of the market to steer an economic planning in a certain length. Competition is a regulation in all the market systems (Pindyck & Rubinfeld, 2008). Economists assume of many buyers and sellers in the market to permit competition. Competition in the marketplace permits price change to respond to the change of demand and supply. Consequently, competition opens up the market for substitutes to enable an individual to compare the price of the product and the substitute to influence the choice of the supplier and the consumer. The industry that lacks substitutes has few suppliers to produce goods and services to enable them control the price. In the meanwhile, the consumer does not have a choice to maximize utility due to the little influence of the good and services.
Perfect competition has the attribute of many buyers and sellers in the market. The market has many products and consequently many substitutes. Perfect competition has few barrier of entry to permit startups since supply and demand influences the price in the market. Producers in perfect competition work with the price determined in the market due to lack of leverage. Economic theory provides that the market players in pure competition do not have the ability to set the price (Pindyck & Rubinfeld, 2008). The market structure serves as a yardstick to all the other market structures. The market structure presents strict conditions to set the price like an action market. Every player in the perfect competition is a price taker to influence the price of the product sold or bought. The structural properties of the market structure include: inability of barriers to entry and exit to make it relatively easy for a participant to join and exit the market.
The assumption is that both consumers and producers have perfect information concerning utility, quality, and the price of the products. There are many buyers with the capability to buy and the suppliers with the ability to supply at a certain price. The sellers and buyers do not incur costs of operation in the market structure. The goal in perfect competition is to maximize profit in the assumption of selling where marginal revenue meets marginal cost. In the short run, a perfect competition market will not produce an efficient output unlike in the long run when the market will have the ability of allocating an efficient production (Pindyck & Rubinfeld, 2008).
In the real world, it is difficult to verify perfect information in approximation as actors wait and observe the behavior of prices before engaging in trade. The absence of externalities in a perfect competition can improve a consumer’s utility according to the Welfare Economics. It is not possible for participants to earn profit in the long run since the firm has to cover all the economic costs. The neoclassical theory and the classical theory have different interpretations concerning profit. It is possible to depict sufficient condition to allocate an efficient production in perfect competition.
A monopoly market structure permits only one producer of a product in the industry. The entry of such a market has high costs and impediments due to political, economic, and social factors (Pindyck & Rubinfeld, 2008). The government can create a monopoly on the industry it wants to control such as the provision of electricity. The barriers of entry in a monopolistic industry are due to exclusivity on the natural resource. The Saudi Arabia has the exclusive right on the oil industry. Companies create monopoly through patent and copyright to prevent rivals from entering such a market. A monopoly exists in an enterprise with only one supplier of a product. The attribute of the monopoly includes the lack of competition in the production of the goods and services and the lack of substitutes in the market. The entity has the ability of raising prices due to market power in the business entity.
The single seller has the power of charging high prices in the industry (Pindyck & Rubinfeld, 2008). The government can initiate the market structure or started through integration. The government initiated monopoly has the incentive to engage in high risk venture. Management structures highlight the importance of this market structure depicted in economic competition so as to provide regulation. The single supplier in the market does not have close substitutes in the market to enable the retention of power.
Other attributes of the market structure include: High barriers to entry that make it hard for other sellers to penetrate the market. The single seller produces all the output in the entire market. The market experiences price discrimination since the single seller can rectify the quality and the price of the product. The seller is the price maker in determining the price of a given quantity in the market to maximize the profit.
Some of the barriers in the market structure include deliberate, legal, and economic barriers. A legal barrier provides one with the opportunity of creating a monopoly by instituting a patent to ensure exclusivity. A monopolist has the ability of reducing the price below a new supplier’s operating cost to avoid competition (Agliardi, 2009). The seller in the market structure relies on large outlay of capital and technological superiority. A company that wants to monopolize the market can engage the elite in political circles through lobbying and collision. The barriers of the exit act as a source of power since they are high to make it difficult for a company to end its course in the market.
An oligopoly market consists of few firms to make the industry. The few firms control the price since the oligopoly has high barriers of entry as a monopoly. The few firms in an oligopoly market have similar products to compete for market share due to the interdependence of the market forces. Oligopolies collude to reduce competition and charge high prices to the consumers. The few sellers influence each other in strategic planning to respond to the market participants.
The market structure has the few sellers’ competition to control the market share (Agliardi, 2009). The competition drives different results due to price shares and other restrictive practices. The market structure translates to a cartel due to collusion of the few sellers. The OPEC is an example of an oligopoly that influences the global price of oil. Some of the attributes of the market include high barriers of entry and exit such as patents, accessing complex technology, economies of scale, and strategic planning to discourage the entry of other firms. Government helps in setting high barriers of entry while favoring the incumbent. The numbers of firms are few such that they can influence others in the industry.
The market structure secures super normal profits due to high barriers of entry to star ups to get a share of the profit. Knowledge concerning economic factors is selective as the sellers have perfect knowledge of the cost and demand functions while the buyers have imperfect knowledge. The oligopolies consist of large firms to influence the market conditions (Agliardi, 2009). Competitors remain alert to firm actions and make necessary response or countermoves in the contemplation of action. Sellers depict fierce competition with low prices and large-scale production.
Monopolistic competition is a market structure with product differentiation to create imperfect competition (Agliardi, 2009). A firm in the market structure uses the prices charged by the competitors to maintain spare capacity. The properties of the market structure include: availability of many suppliers and consumers in the market to ensure that no one supplier has the entire price control in the market. Consumers perceive no price differences between producers in the monopolistic competition. The market structure has few barriers of entry and exit in the market (Agliardi, 2009). Producers ensure a certain degree of price control in the market. The market structure produces heterogeneous products to ensure product differentiation and non-price competition.
Firms in this structure make similar long-run profits with forms in perfect competition. The firm can affect the price in terms of brand loyalty in the market to retain customers. The price elasticity of demand in the market structure is positive. The product differentiation cannot eliminate other substitutes. Goods perform the same function with few differences in style, appearance, location, and type. Monopolistic competition does not have entry and exits cost in the long run as there are many firms have the ability of entering the market with distinct goods.
References
Agliardi, E. (2009). Learning by doing and market structures. Florence, Italy: European University Institute.
Pindyck, R. S., & Rubinfeld, D. L. (2008). Microeconomics (6th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.
