Understanding Market Structures: From Perfect to Imperfect Competition
Industry
Industry applies to all individual production units and companies grouped in the development of a single good or service.
Deadlines
Short term: A period of time long enough for production changes that have no modifications made in the size of companies.
Long term: A period of time long enough to produce changes in production levels by altering the size of the industry.
Costs
Cost: The expenditure incurred to produce a given amount over a period of time.
Fixed costs: These are produced independently of production volume.
Variable Costs: Are those that change with output levels. These are generated only when performing productive activities.
Average Cost
- Average variable costs: These correspond to the variable costs per unit of output.
- Average fixed costs: These correspond to the fixed costs per unit of production.
- Total average costs: These correspond to total costs per unit of output.
Marginal Cost
Marginal cost indicates how much the total cost increases as a result of producing an additional unit. At first, this is decreasing, as yields are rising, but with increasing production levels with the same fixed factors, yields are decreasing, so the marginal cost increases.
Marginal Revenue
Marginal revenue indicates how much total income increases as a result of a unit increase in the quantity produced.
The slope of the marginal revenue curve is negative.
Maximum Benefit Balance
One company finds its position of greatest benefit when the last unit sold generates extra income which equals the additional cost, i.e., marginal cost equals marginal revenue.
In a situation of perfect competition, marginal revenue equals price.
Imperfect Competition
There is a market of imperfect competition in an industry where companies exercise some control over the price of the product they develop, through changes in production volumes.
A Perfectly Competitive Market Is Characterized By:
- Homogeneity in products
- Many producers and buyers
- Free entrance and exit to markets
- Adequate availability of information
Causes of Imperfections in Markets
- A. – Economies of scale
- B. – Stock of patents
- C. – High customs tariffs
- D. – Product differentiation
Monopoly
In the economy, a monopoly is generated when there is only one seller or producer of a specific asset.
In a situation of imperfect competition, the maximum benefit balance is found where marginal cost equals marginal revenue.
Oligopoly
1. An oligopoly occurs when there are few sellers or producers that produce a specific asset.
2. Collusion: Sometimes, to avoid a price war, the few sellers can agree on how much to produce, affecting the price of the property, forming a cartel, thereby maximizing their benefits together. This situation occurs when the product sold is identical.
3. When oligopolists can fully collude, prices and quantities produced are similar to those of a monopoly.
Dominant Enterprise Oligopoly
When a company controls between 60 and 80% of the market and several small businesses supply the rest, the dominant company indicates to the others what it believes should be the selling price of the products they produce.
Economic Inefficiency of Imperfect Competition
The greatest inefficiency of imperfect competition that arises is the fact that it generates a misallocation of resources in the economy.
To fight it, among the main tools that can be used by the authority, we can mention the opening of markets, reduction or even elimination of customs duties, taxes, and subsidies.