The importance of Market Structures in the economy
Market models provide a model with which to compare the characteristics of real markets.
- Perfect Competition which is a market with many competitors and a standardized product.
- Monopoly's which are companies that control a market with high barrier of entry.
-Monopolistic competition which is a market with many different competitors and products that consumers can choose from
- Oligopoly's which are markets that have few competitors participating in them that sell standardized or differentiated products.
- Demand and Profit Maximization Which is when perfect profit is achieved.
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- No barriers of entry
- Each unit of input, such as units of labor, are also homogeneous.
- Firms produce homogeneous, identical, units of output that are not branded.
- There are a very large numbers of firms in the market.
- Information is free and available for everyone.
Advantages - This market competition model is very consumer friendly and is filled with product information so the consumer is never mislead.
Disadvantages - No scope for economies. Also all the products are unique. Lack of supernormal profits may mean the investment of Research and Development(R&D) is unlikely. Important for industries like pharmaceuticals.
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- High Barrier of entry
- Single Supplier controls product output in the market.
- Unique Product
- Specialized information
Advantages - Monopolies allow for high research and development and the increased output would lead to a high level of production. Also monopolies tend to be successful and stable companies.
Disadvantages - No consumer control over price and poor level of service. Lack of competition leads to low quality, high priced products.
Example: Herff Jones is the only company that provides class rings, they also provide graduation garments.
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- Different barriers of entry
- Small number of firms
- Both Identical and Differentiated Products.
Advantages - Large firms have strong holds over market, but consumers still have say over prices. Product evolution is also still apart of oligopolies in order to beat rivals.
Disadvantages - Setting of prices is somewhat determinable. Firms always have to consider their rivals and new creative ideas tend to fail. (Nintendo)
Examples: Coke and Pepsi control the soda market.
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- Product differentiation.
- Many firms.
- No entry and exit cost in the long run.
- Independent decision making.
- Some degree of market power.
- Buyers and Sellers do not have perfect information (Imperfect Information)
Advantages - No significant barriers of entry so you can jump in and out. The different products also provide the consumer with much variety in their products, they are more efficient then monopolies
Disadvantages - Same differentiation does not create utility but creates unnecessary waste from extra packaging. There is a lot of inefficiency compared to other markets.
Example : Hotels and Pubs, General Specialist Retailing.
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