Differentiating Between Market Structures
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Differentiating between Market Structures
The structure of a market is defined by the number of firms in the market, the existence or otherwise of barriers to entry of new firms, and the interdependence among firms in determining pricing and output to maximize profits. The author of this paper will cover: the advantages and limitation of supply and demand identified in the simulation, the effectiveness of the organization in which the author knows, and how the organizations in each market structure maximizes profits.
The simulation looks at all four types of market structure within the East-West Transportation Company. The four divisions operate within each of the four market structures. The divisions are Consumer Goods, Coal, Chemical and Forest Products.
The Advantages and Limitation of supply and demand
The first scenario, the author has to decide whether to continue operations or shut down operations. The author has decided to continue operations in the perfect competition market. In the scenario the market demand curve is downward sloping, each seller perceives the individual demand curve facing him or her to be perfectly elastic at a given price. Given this scenario this demand curve and the cost structures, sellers try to produce and output at maximized profit.
The second scenario has the author looking at the coal division, which operates in the monopoly structure. Tanya Roy pointed out that the law of demand holds in a monopoly. At a high price, quantity demanded is high and profit would not need to be high. For a monopolist, price exceeds marginal revenue. Thus, at the output where Marginal Revenue = Marginal Cost, you extend the quantity line to the demand curve to determine the price to charge for this output. The demand curve is facing in a downward slope in the monopolist structure.
The third scenario the market structure is oligopoly- duopoly in the Chemical Division. The industry marginal cost curve is combined with the industry demand, which is downward curve, and marginal revenue curves.
The last scenario the author is working in the Forest Product Division. The Forest Product Division operates in the monopolistic competition market structure. A firm operating in monopolistic competition faces a downward sloping demand curve (University of Phoenix, 2008).
The effectiveness of Staples
Staples operates in the monopolistic competition. Staples carries many different brands and items within the store. Staples, unlike many monopolistic competition companies are concerned about what the major local competition is doing with their prices. Staples hires an outside company to check the different prices on items that they all carry alike, and then they decide to adjust their price accordingly to the research. Since Staples operates in the monopolistic competition, the demand curve faces in a downward slope. The downward вЂ“ sloping demand curve means that in making decisions about output, the monopolistic competitor will use a marginal revenue curve that is below price. At its profit-maximizing output, marginal cost will be less than price (The McGraw-Hill, 2004). In the monopolistic competition market structure the competition implies zero economic profit in the long run. If Staples shows a profit then the competition in the market will lower the price to increase their profits and stop Staples. This would continue until the profits disappeared and the new demand curve is tangent to the new average total cost curve.
Market Structure Maximize Profits
The goal of a firm is to maximize profits, to get as much for the firm as possible. In the perfect competition, each firm maximizes profits where marginal revenue (MR) equals marginal cost (MC). That is, the additional revenue from producing additional quantity equals the additional cost incurred in producing that quantity. At an output where MR is greater than MC, increasing production increases profits. If MR is less than MC, decreasing production increases profits. Therefore, MR=MC is the profit-maximization condition. In perfect completion, the price is a given for each firm, P=MR. This is because