Investigation of Market Structures

Investigate a variety of market structures

( 1. 1 + 1. 2 )

Type of Monopolies :

  • Pure Monopoly : One company dominates the market and can maintain this because of high obstacles to entry
  • Natural Monopoly : One firm is able to supply the whole market at a lower cost than several firms

Natural Monopoly Definition: A monopoly identifies a situation where all (or most) sales in a market are carried out by an individual firm. A natural monopoly in comparison is an ailment on the cost-technology of an industry whereby it is most efficient (involving the minimum long-run average cost) for creation to be concentrated in a single firm. In some cases, thus giving the largest distributor in an industry, often the first dealer in market, an overpowering cost gain over other real and potential competitors. This tends to be the situation in establishments where capital costs predomination, creating economies of scale that are large with regards to how big is the market, and therefore high barriers to entry, examples include public utilities such as water services and electricity.

For instance in New Zealand is electricity, electricity generation divide from line-transmission and retail activities. I selected New Zealand electricity to be my example because the electricity in New Zealand is an enormous industry, like resources, require enormous initial investment and New Zealand electronic is a natural monopoly elements. However, It could be symbolized by the downward - sloping average cost curve.

Graph 1 : Cost/Price/Revenue


P' Supernormal profit



AR =P= D

Q MRQuantity

The monopolist increase. The purchase price by minimizing electricity end result. The given climb huge income. This profit is earned entirely for monopoly gain. This abnormal, profit is the earnings that arises in addition to the normal income. Abnormal revenue are acquired without entrepreneurial effort.

Likewise, all of the companies always want to achieve the maximum profit or minimizes a damage so the proper way to do that is to produce the number and charge the price at MR = MC (Marginal Income = Marginal cost) point. If the electricity becomes higher price, folks have no choice but nonetheless need to put it to use and shell out the dough. As a result, it could produce at the same Volume but charging price and it would charge an increased price at P become Subnormal. Government imposes a maximum price of P ''resulting in an outcome of Q' where P=MC. This may bring about subnormal revenue.

Graph 2 :



P' Supernormal profit

Subnormal profit E MC


AR =P= D

Q Q' Quantity


SUB-NORMAL PROFIT - is any revenue less than normal profit. Over time a firm will leave a business if it continues to make only sub-normal gains. Also called an economic loss.

  • A subsidy : A subsidy is a offer or other financial assistance distributed by one party for the support or development of another. Subsidy has been used by economists with different meanings and connotations in different contexts. According to 1 OECD explanation, "A subsidy is a strategy that keeps prices for consumers below market levels, or keeps prices for providers above market levels or that reduces charges for both manufacturers and consumers giving immediate or indirect support. " The most common description of a subsidy identifies a payment made by the federal government to a developer. Subsidies can be immediate - cash grants or loans, interest-free loans - or indirect - taxes breaks, insurance, low-interest lending options, depreciation write-offs, rent rebates. This form of support can be legal, illegal, ethical or unethical. Subsidies are being used for a variety of purposes, including job, creation and exports.

A production subsidy stimulates suppliers to increase the output of a specific product by partly offsetting the production costs or losses.

Subsidies are often regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort market segments, and can impose large monetary costs. Financial assistance in the form of a subsidy may come from one's government, however the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental corporations.

Graph 3 :

It is difficult to determine where AC is. It includes finding the value of normal revenue. Placing P=AC. Consumers can pay a lower price. This sort of regulation will not require any remedial action by the govt in the form of a subsidy.





AR =P= D

Q MRQuantity

DWL = deadweight loss

A deadweight damage is a lack of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who have significantly more marginal benefit than marginal cost aren't purchasing the product, or individuals who have more marginal cost than marginal benefit are purchasing the product.

Minimum wage and living wage regulations can create a deadweight reduction by causing employers to overpay for employees and avoiding low-skilled workers from securing jobs. Price ceilings and hire control buttons can also create deadweight deficits by discouraging creation and lessening the way to obtain goods, services or casing below what consumers truly demand. Consumers experience shortages and companies earn less than they would usually. Taxes are also thought to develop a deadweight damage because they prevent people from engaging in purchases they would usually make because the final price of the merchandise will be above the equilibrium selling price.

(1. 3)

  • Perfect competition : Identifies a market framework whose assumptions are strong and for that reason unlikely to exist in most real-world marketplaces. Economists have grown to be more considering pure competition partly because of the progress of e-commerce as a way of shopping for and selling goods and services. And in addition due to acceptance of auctions as a tool for allocating scarce resources among contending ends. Perfect competition is available when there is a very large variety of small companies trading in the same or very similar goods or services, and none of them of whom can affect the purchase price by increasing end result or restricting it.

Also, the business people have perfect knowledge about costs and prices across the market. Everyone knows the state of everybody else's costing and has perfect home elevators the needs and wants of buyers. Also, there are no obstacles to entry into the market. Anyone can join if they believe there is certainly money to be made. But as soon as one trader starts to advertise or use a brand name to attract trade, the market perfection will be lost. When each investor tries to create a niche on the market, by claiming top quality or a long-established family custom for service, your competition will become less than perfect. You can view that perfect competition is never likely to exist the truth is. Some simple agricultural marketplaces in the growing world will fit the model. It is often said that the petroleum market is properly competitive but that can't be true. The barriers to entrance are tremendous in conditions of capital expenses, geological exploration, branding etc.

Assumptions for a flawlessly competitive market :

- Many vendors each of whom produce a low percentage of market result and cannot affect the prevailing selling price. For example in the forex market, there are numerous sellers who form total of market supply. Individually, seller is a firm and collectively, it can be an industry. In perfect competition, price of item is set by market forces of demand and offer. i. e. by clients and retailers collectively. Here, no individual seller is able to change the purchase price by controlling supply. Because specific seller's individual resource is an extremely small part of total supply. So, if that owner alone raises the purchase price, his product can be costlier than other and automatically, he'll be out of market. Hence, that owner has to admit the purchase price which is set by market forces of demand and offer. This ensures solo price in the market and in this way, seller becomes price taker rather than price.

- Many specific buyers, none of them has any control over the marketplace price. Because individual buyer's individual demand is an extremely small part of total demand or market demand. Every buyer must accept the price made a decision by market forces of demand and offer. In this manner, all customers are price takers and not price manufacturers. This also ensures lifetime of single price in market.

  • Perfect freedom of admittance and exit from the industry. Firms face no sunk costs and entry and leave from the marketplace is feasible over time. This assumption means that all firms in a flawlessly competitive market make normal profits over time.
  • Homogeneous products are provided to the markets that are perfect substitutes. This brings about each companies being "price takers" with a correctly stretchy demand curve for his or her product.
  • Perfect knowledge - consumers have all easily available information about prices and products from competing suppliers and can gain access to this at zero cost - quite simply, there are few trades costs involved in searching for the mandatory information about prices. In the same way retailers have perfect knowledge about their competition.
  • Perfectly mobile factors of development - land, labour and capital can be switched in response to changing market conditions, prices and incentives.
  • No externalities arising from production and consumption.

Graph 4 a :

In the brief run, it's possible for an individual company to make an economic profit. This example is shown in this diagram, as the purchase price or average income, denoted by P, is above the average cost denoted by C.




P Economic (unnatural ) profitD = AR = MR


Cost of production

O Qe Quantity

Graph 4 b :

In the long period, economic profit cannot be sustained. The introduction of new companies or expansion of existing firms (if dividends to range are constant) in the market triggers the (horizontal) demand curve of each individual company to move downward, bringing down at exactly the same time the price, the average revenue and marginal income curve. The final outcome is the fact that, in the long run, the firm will make only normal profit (zero economic earnings). Its horizontal demand curve will touch its average total cost curve at its lowest point.





Q Quantity

  • Monopolistic competition : Monopolistic competition is a kind of imperfect competition in a way that many companies sell products that are differentiated in one another as goods but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a company takes the prices billed by its competitors as given and ignores the impact of its own prices on the prices of other companies. In the existence of coercive authorities, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the organization maintains free capacity. Models of monopolistic competition are often used to model companies.

Has the next characteristics :

- Product differentiation. MC companies sell products which have real or recognized non-price dissimilarities.

- Many businesses : There are lots of companies in each MC product group and many businesses on the side lines prepared to enter the marketplace. A product group is a "assortment of similar products"

- Free entry and exit over time.

- Unbiased decision making.

- Market Vitality.

- Potential buyers and Sellers do not have perfect information (Imperfect Information).

Examples : Shops and other service providers. : Dairies, Takeaway shops, Hairdressers and Garages

https://en. wikipedia. org/wiki/Subsidy#Economic_Effects

http://en. wikipedia. org/wiki/Natural_monopoly

http://www. tutor2u. net/economics/revision-notes/a2-micro-perfect-competition. html

http://en. wikipedia. org/wiki/Perfect_competition

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