This week we learned that industries consist of all firms making similar or identical products. Their market structure depends on the number of firms in the industry and the ways in which they compete. Our text discussed four basic market structures. The first market structure is perfect competition. Perfect competition occurs when numerous small firms are in competition with each other. Businesses in a competitive industry produce the socially optimal output level at the absolute minimal possible cost per unit. Another type of market structure is known as a monopoly. This is an easy enough concept to comprehend, but I went back and forth with a few classmates as to different examples of a monopoly. Technically, a monopoly is a business that basically has no competitors in its industry. They reduce output to drive up prices and increase profit. In doing so, they produce less than the socially optimal output level and produces at higher cost than competitive businesses.
One example of a monopoly would be the existence of only one option in utilities in any particular region. The third type of market structure is known as an oligopoly. This is a type of industry that has very few firms, and if they collude they can reduce output and drive up profits much like a monopoly does. This doesn’t always work though because a lot of times businesses will not honor their agreement with their competing industries. This will make the firms end up competing against each other for consumers business. An example of this type of structure would be the airline industry. This type of situation often benefits consumers. The fourth type of market structure is a monopolistic competition. In this type of structure industries have slightly different products, but still compete against one another.
One example of this would be restaurants, and how they all serve food, but different types and at different prices in different locations. Consumers also benefit from the varieties in this type of market structure. How do markets evaluate the effectiveness of competitive strategies in their structures? For example they do so by evaluating their products, and differentiating their products to survive in the long run. The main way to evaluate the effectiveness is to check the bottom line. The goal of every business is to make money, so an increase in profits will let you know your strategies are effective. Profit maximization is a subject that I personally found a bit intimidating. Profit maximization is the process of obtaining the highest possible level of profit through the production and sale of goods and services.
This assumption is the guiding principle underlying production by a firm. In a perfect competition structure, it can be tough to maximize profits. A monopoly has free range to do as they will and therefore it is easier to maximize profits. In an oligopoly market very forms of collusion can reduce competition and lead to higher cost for consumers and higher profits for themselves. Strategic planning by oligopolists must take into account the likely responses of the other firms in their market. In a monopolistic structure the firm maximizes its profits by equating marginal cost with marginal revenue.
The intersection of the marginal cost and marginal revenue curves determines the firm equilibrium. The behavior of a monopolistic structure and a monopoly structure appear to be quite similar, especially in the short run. In summary, week 3 was a week packed with interesting conversations started by discussion questions. We are still in a bit of a haze when it comes to economic in general, but are clinging on to hope that we have enough of an understanding to be successful. Research and studying is the key, making yourself more familiar with the terms and their meanings.