Market Structures
Maximizing Profits in Market Structures Paper Josie Vennable Axia College of University of Phoenix
INTRODUCTION
When economists analyze the production decisions of a firm, they take into account the structure of the market in which the firm is operating. The structure of the market is determined by four different market characteristics: the number and size of the firms in the market, the ease with which firms may enter and exit the market, the degree to which firms’ products are differentiated, and the amount of information available to both buyers and sellers regarding prices, product characteristics, and production techniques (Duffy, 1993.)
Economists distinguish among four different market structures, which they refer to as perfect competition, monopoly, monopolistic competition, and oligopoly. This paper will discuss the following market structures characteristics, how is the price determined, how is the output determined, if there are any barriers and what role does each market structure play in the economy. Based on the differing outcomes of different market structures, economists consider some market structures more desirable, from the point of view of the society, than others.
BARRIERS TO NEW FIRMS ENTERING THE MARKET
The difficulty or ease with which new firms can enter the market for a product is also a characteristic of market structures. New firms can enter market structures classified as perfect competition or monopolistic competition relatively easily. In these cases, barriers to entry are considered low, as only a small investment may be required to enter the market. In oligopoly, barriers to entry is considered very high—huge amounts of investment, determined by the very nature of the product and the production process, are needed to enter these markets. Once again, monopoly constitutes the extreme case where the entry of new firms is blocked, usually by law. If for whatever reasons, new firms are allowed to enter
INTRODUCTION
When economists analyze the production decisions of a firm, they take into account the structure of the market in which the firm is operating. The structure of the market is determined by four different market characteristics: the number and size of the firms in the market, the ease with which firms may enter and exit the market, the degree to which firms’ products are differentiated, and the amount of information available to both buyers and sellers regarding prices, product characteristics, and production techniques (Duffy, 1993.)
Economists distinguish among four different market structures, which they refer to as perfect competition, monopoly, monopolistic competition, and oligopoly. This paper will discuss the following market structures characteristics, how is the price determined, how is the output determined, if there are any barriers and what role does each market structure play in the economy. Based on the differing outcomes of different market structures, economists consider some market structures more desirable, from the point of view of the society, than others.
BARRIERS TO NEW FIRMS ENTERING THE MARKET
The difficulty or ease with which new firms can enter the market for a product is also a characteristic of market structures. New firms can enter market structures classified as perfect competition or monopolistic competition relatively easily. In these cases, barriers to entry are considered low, as only a small investment may be required to enter the market. In oligopoly, barriers to entry is considered very high—huge amounts of investment, determined by the very nature of the product and the production process, are needed to enter these markets. Once again, monopoly constitutes the extreme case where the entry of new firms is blocked, usually by law. If for whatever reasons, new firms are allowed to enter
References: Duffy, J. (1993). Cliffs Quick Review, Economics, Hoboken, NJ:Wiley Publishing http://www.referenceforbusiness.com/encyclopedia/Clo-Con/Competition.html