PRICE AND OUTPUT DETERMINATION UNDER

 DIFFERENT MARKET STRUCTURES

 

A MARKET includes the actions of buyers and sellers and their effect on the price of a product. (e.g. there is a market for children's toys, frozen foods, shoes, etc.)

Markets are categorized according to:

 (1) the number of firms in the market

(2) the ease with which new firms can enter and

             leave the market

       (3) the degree to which the products of different

            firms are identical

There are four major market structures

PERFECT COMPETITION-production by

       many firms of an identical product

 

MONOPOLY-production by a single firm

MONOPOLISTIC COMPETITION-pro­

        duction by many firms with differentiated products.

         OLIGOPOLY-production by a few dominant

         firms

 

 

The followi.ng table further explains how price and output are determined in each market.

 

Market Pure Competition

Market Methods Related to Price Firm can't set price-takes price as given. Price tends towards a

minimum. Price is usually equal to cost of production. In the long-run economic profits are zero. Demand and Supply tend toward equilibrium to the benefit of the consumer.

 

Examples: some parts of the retail market, corn or wheat farmers in the U.S.

Production

Tends towards a maximum.

Characteristics

Many sellers. Homogeneous product. Freedom of exit and entry. Perfect information.

 

 

 

 

 

 

Pure Monopoly

Firm can set the price. Charges a higher price than a perfect competitor. Price does not reflect the cost

of production.

Output is restricted. usually to point where greatest return is realized.

Single firm produces a product with no close substitute. Hard or impossible for other firms to enter the industry.

 

 

            Examples: utilities. phone companies in U.S.

 

Monopolistic Competition

Firms advertise their product and compete based on quality packaging, services. etc.

Price is slightly higher than it would be under pure competition.

In the long run output is lower than the level of output that minimizes the the firm's unit costs. Overproduction of goods.

Many sellers.

Freedom of exit and entry. Heterogenous products. Products differ in accordance with brand name.

 

           Examples: brand name breakfast cereals. shoes stores, restaurants.

 

         Oligopoly

 

 

 

Dominating firms try to set price for the whole industry. Threat of price warfare and government regulations tends to maintain competition.

 

 

Individual firms may choose a level of output which maximizes their individual sales revenue or firms

may collectively choose a level of output which will maximize their joint profits.

 

 

A few big firms dominate the market.

Products mayor may not be identical.

Behavior of one firm affects the other firms in market

­

               Examples: toothpaste market steel, automobile, tobacco

 

 

 

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