Market Structure / Supply & Demand Essay
Market Structure / Supply & Demand
Monopoly – one person or company dominates provision of a particular product or service, in the absence of competitors. Consumers do not have a choice for provision of the product in question. A monopoly can ‘call the shots’ on their product (price, availability etc.) as there is no alternative on offer to consumers. Monopolists tend to produce a limited number of product which are then sold at a high price (there is no need to compete). (Control of demand) The British Government seeks to restrict the behaviour of monopolies, so preventing unfair business behaviours.
Oligopoly – a small number of dominant firms or individuals compete to provide a product or service. Competition is limited and as a result, very closely related. Everything a competitor does directly affects your business. E.g. If one company drops its prices all the other businesses in the oligopoly are affected. Business decisions must always consider competitor’s influence / reaction. An oligopoly may agree to maintain artificially high prices – technically illegal but difficult to prove if nothing is in writing.
Duopoly – taken literally a duopoly means 2 firms control a market. In reality is usually means that 2 firms dominate a market by having the biggest share in it.
Examples of duopolistic markets include Coca Cola and Pepsi as dominant suppliers of soft drinks. There are many competitors in the field but Coke and Pepsi have such a huge share of the market that they don’t usually see them as competition or influence on their business decisions.
Perfect competition – theoretical – as are all the above definitions. Multiple providers offer a wide choice to a broad spectrum of consumers. Consumers benefit from freedom of choice and businesses competing for their custom through competitive pricing and customer service.
Supply and Demand
The concept of supply and demand is at the heart of a market economy. Prices, earnings, and the supply of goods is determined by the demand for it by consumers.
Demand – In economic terms this is the amount of a product (or service) desired by consumers.
Supply – The quantity of a product or service a producer is willing to make available to consumers and the price at which they want to sell that product.
Demand Curve – a graph showing the correlation (or demand relationship) between the price of a product or service and how many consumers would desire it at different prices (if all other variables are unchanged). It is an attempt to quantify preference. I.e. how much a consumer is willing to pay for something and at what point the cost outweighs the desire. Companies may use this demand relationship as a pricing guide and to determine how much of a product to manufacture, which in turn indicates the level of resources required. The simplest interpretation which can be drawn is that as prices rise, demand drops and vice versa.
As we can see from the graphic above, at point A the highest price (P1) reflects the lowest quantity demanded (Q1). Conversely, at point C the number of units in demand (Q3) is much greater when the price (P3) is considerably lower.
The downward slope of the curve reflects a negative relationship between price and quantity demanded. I.e. as one factor rises, the other drops and vice-versa.
Variables other than price affecting demand.
Demography – the statistical make up of consumers (age range, income bracket, education, political persuasion etc.) all influence the demand for goods and services.
Income – a rise in income often correlates with a rise in demand for a good. The exception to this is if a good is considered ‘inferior’ – a rise in income may result in a switch to goods considered to be of higher quality. (e.g. ‘plonk’ to fine wine)
Substitutes – Supply Curve
The basic premise from the supplier’s point of view is that the higher the price a good can be sold for – the more a business will be willing to supply.
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