Market Structures: Understanding Competition and Pricing
Market Structures
Definitions
Market: A medium where buyers and sellers interact to exchange goods and services.
Demand Function: Indicates the quantity of a good or service consumers are willing to buy at each price level, considering factors like prices of related goods, consumer preferences, and income.
Supply Function: Indicates the quantity of a good or service producers are willing to sell at each price level, given constant production costs and business expectations.
Excess Supply (Surplus): Occurs when the price is above equilibrium, resulting in more goods offered for sale than consumers are willing to buy.
Excess Demand (Shortage): Occurs when the price is below equilibrium, resulting in more demand for a good than producers are willing to supply.
Price Elasticity of Demand: Describes how the quantity demanded of a good or service reacts to a change in its price.
Inelastic Demand: A price change causes a proportionally smaller change in quantity demanded. A price increase raises total revenue, while a price decrease lowers it.
Elastic Demand: A price change causes a proportionally larger change in quantity demanded. A price increase lowers total revenue, while a price decrease raises it.
Competition: Rivalry between companies seeking to sell similar goods or services to consumers in the same market.
Entry Barriers: Obstacles that prevent or hinder a company from entering a market. These can be legal (regulations, licenses) or economic (high initial investment).
Perfect Competition
A market structure with many small firms producing a homogeneous product, where no single producer can influence the price.
- Low barriers to entry and exit.
- Many small firms with insignificant market share.
- Homogeneous product.
- Full information for producers and consumers.
- Producers are price-takers.
Monopolistic Competition
A market structure with many firms selling differentiated products, with low barriers to entry.
- Low barriers to entry and exit.
- Many producers.
- Differentiated products.
- Producers have some price-setting power.
Oligopoly
A market structure with a limited number of firms producing similar products, where each firm’s actions significantly influence the others.
- Small number of large firms.
- Significant market share for each firm.
- High barriers to entry.
- Strategic interdependence between firms.
Monopoly
A market structure with a single supplier or a dominant firm controlling a large percentage of the market.
- Single seller or dominant firm.
- High barriers to entry.
- Unique product.
- Substantial price-setting power.
Monopoly can arise from:
- Control of essential resources.
- Technological dominance.
- Government regulation (statutory monopoly).
- Natural monopoly (high fixed costs, low variable costs).