ECO204: Principles of Microeconomics (BAK1548A)

MARKET STRUCTURE

Market Structure

Joseph Douglas

Robert Gordon

January 11, 2016

Market Structure

Even though there has always been talk about that Leesville is not growing and there is nothing to do, but why are there new hotels, roads being built, new restaurant and car dealership. Prefect competition has a large number of sellers and by having many sellers it tends to keep the price steady across the board, because of the competition. Because there has been a change in the market structure in all industries in Leesville including roads and highways. There are differentiated oligopolistic in the auto mobile industry in town in the last five years, and there is no firm that has a monopoly in the city of Leesville or surround the cities.

Describe each market structure discussed in the course (perfect competition, monopolistic competition, oligopoly, and monopoly) and discuss two of the market characteristics of each market structure.

Perfect Competition is the market structure in which they’re many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry. (Amacher & Pate, 2013, Ch. 9) The perfect competition has six characteristics. One is a large number of sellers and by having many sellers it tends to keep the price steady across the board, because of the competition. This is favorable for consumers. Another that is very important and that is there is free entry into and free exit out of the market. Its like The Isley Brothers would say, “It’s Your Thing, and do what you want to do.” A person can start a business and quit without any repercussion what so ever.

Monopoly is the structure in which there is a single seller of a product that has no close substitutes. (Amchers & Pate, 2013, Ch. 10) Unlike perfect completion that has no influence on price and known as a price maker. Monopoly is a price searcher that set prices and because of the law of demand curve the monopolistic is the market and have to follow the demand curve the firm may have to lower its prices to sell more units of output, which will reduce the marginal revenue and will not earn any profits. On the other hand price searcher has monopoly power by setting prices to maximize profits, by use barriers and discrimination. The barriers are set to the monopoly in place. There are natural barriers, that large firm under cut price of there competitors and capture their customers. Other barriers are artificial and government. Now discrimination is another way of expanding monopoly profits, this is one of the most used because it reaches out form coast to coast. It involves the young and old alike. There is senior citizen program at restaurant and at a lot of business, as well as discount for students.

Monopolistic Competition describes an industry composed of a large number of sellers. Each of these sellers offers a differentiated product, which is a good or service that has real or imagined characteristics that are different from those of other goods or service. The salespeople may be nicer, the packaging prettier, the credit terms netter, or the service faster. (Amchers &Pate, 2013, 11.3) The monopolistic competition has a short-run equilibrium and a long-run equilibrium. The short-run equilibrium has a unique demand curve that firms follows as a result of he differentiated nature of the product representation of what the customer wants at their price. Amcher & Pate, states that “ The relative elasticity of the demand curves is a measure if the degree of differentiation within the industry. If the products are only slightly differentiated, then they aye close substitutes and each firm’s demand curve will be very elastic. If the products are highly differentiated the demand curve will be less elastic, indicating that the firm can more easily raise the price without losing many customers.” (Amcher & Pate, 2013, 11.3) Now on the other hand, long-run equilibrium is when new firms get into the industries out to do like everyone else to make a profit, but the more enter changes the level of profit. If prices are to higher, then you may lose some and if the prices where low, you would catch the bargain searcher.

Oligopolistic is the market structure in which there are only a few firms or a few firms dominate the market. (Amcher & Pate, 2013, 11.4) In respect to the interdependence of what the competition may do with their output or prices. The forecast remain mutual because there are only a few firms or a few dominate the market. Oligopolies are difficult to analyze because of their interdependence by the type of product they produce. The two types of produces are homogeneous and differentiated. Which homogeneous is known as pure oligopoly, that everyone will get charge the same across the board, like lumber from a mill. And differentiated is not like pure or standardized oligopoly with a single price in differentiated oligopolies Amcher & pate states “ the more differentiated the products, the greater the price divergence. Tight price clusters indicate very little product differentiation”. The industry example that they gave was automobile.

Characteristics

Small number of firms these few firms control the entire market supply, competition among the few firms.
Interdependence among Oligopolistic Firms because the number of firms is so small, any decisions made by one of the firms will affect the demand, price, and profits of the rival firms.
Substantial economies of Scale large-scale production is typically needed to minimize costs
Significant Barriers to Entry just as with monopolies, barriers to entry limit the ability of new firms to compete with existing firms.
Products may be Either Identical or Differentiated
When the firms produce identical goods there is less opportunity for non-price competition
When differentiated goods are produced, the firms can use style, quality and advertising as competitive weapons.

Identify one real-life example of a market structure in your local city and relate your example to each of the characteristics of the market.

The hotel is an example of the market structure in the local area. Monopolistic competition would be the market structure for the hotel. Leesville is a small town that is supported by Folk Polk Army base, which is known as JRTC (Joint Readiness Training Center) one of the largest and most active training center state side. Leesville is know as a retirement community and before the last five years there was nothing moving as for as growth. The hotel industries was very few, which corner the market because of the need for the soldiers that would come for training and as training expand the units expand and there wasn’t adequate temporary housing on post and few off. With in the last five years the building of hotel began to pop up through out the city as well as outside of Fort Polk with more or less differentiation on the price range. Depending on the product differentiation of the hotels. In the case of the Leesville being in an area where there where limited vacancy, even after the building of the new hotels. The differentiation is high because of the needs of the military and surrounding industries. Which make it easy to raise prices without losing many customers.

Explain the price elasticity of demand in each market structure and its effect on pricing of its products in each market. The precise measure used for this purpose is called the price elasticity of demand, or simply the elasticity of demand. We define elasticity of demand as the ratio of the percentage change in quantity demanded to the associated percentage change in price. Demand is called elastic if, say, a 10 percent rise in price reduces quantity demanded by more than 10 percent. Demand is called inelastic if such a rise in price reduces quantity demanded by less than 10 percent. Economists created the elasticity concept precisely in response to this problem. Elasticity measures responsiveness on the basis of percentage changes in price and quantity rather than on absolute changes. The elasticity formula solves the units problem because percentages are unaffected by units of measurement. If the government defense budget doubles, it goes up by 100 percent, whether measured in millions or billions of dollars. If demand for pizza trebles, it rises by 200 percent, whether we measure the quantity demanded in number of pies or slices. The elasticity formula given earlier therefore expresses both the change in quantity demanded and the change in price as percentages.

Indeed, while there has always been talk about that Leesville is not growing and there is nothing to do, but why are there new hotels, roads being built, new restaurant and car dealership. Prefect competition has a large number of sellers and by having many sellers it tends to keep the price steady across the board, because of the competition.

References

Ashford Textbook (Online edition): *

Amcher & Pate (2013). Microeconomics Principles and Policies

Web Page:*

U . S . S U P R E M E CO U RT, D U P O N T C E L LO P H A N E D EC I S I O N ( 1 9 5 6, P.105, 106)