Monopoly Economies Of Scale

Published Date: 02 Nov 2017

INTRODUCTION

In every area of human enterprise and endeavor, there's a big picture and a little picture, the macro and the micro. The macro looks at things through a wide-angle lens; the micro looks at things through a narrow-focus lens. This is also true in economics and its two branches, macroeconomics and microeconomics. By contrast, microeconomics studies a limited, smaller area of economics, including the actions of individual consumers and businesses, and the process by which both make their economic decisions – buying, selling, the prices businesses charge for their goods and services and how much of these goods and services they produce and or offer. Microeconomic study reveals how start-up businesses have determined the competitively successful or unsuccessful pricing of their goods and services based on consumer needs and choices, market competition and other financial and economic formulas. Microeconomics also studies supply-demand ratios and its effect on consumer spending and business decision-making.

At the heart of consumer purchasing is the concept of utility, a classic economic idea. Utility is the term applied to a consumer's satisfaction after the purchase of some product or service. Because a consumer's feeling of satisfaction may be impossible to precisely quantify in actual numbers, the concept may seem impractical. But a reasonably close approximation is useful to businesses, and may also be useful to the individual consumer who can probably measure that feeling of satisfaction with a "gut" reaction.These concepts are explained in the following tutorial on microeconomics. The information is both practical and theoretical, and fascinating as well. It will provide the reader with a big picture of small picture economics. 

TASK 1

ELUCIDATE MONOPOLY ANS ITS CHARACTERISTICS. PROVIDE DIAGRAM.

Definition of Monopoly

The Theory of the Firm studies the profit-maximizing behavior of a firm, and that behavior depends in part on the demand curve the firm faces. There are two interesting cases. Under Perfect Competition, the firm faces a horizontal demand curve. It can sell any quantity desired at the market price, but cannot sell anything above the market price. Under Monopoly / Monopolistic Competition, the firm faces a downward sloping demand curve. Its price does affect the quantity sold either because it is the only firm in the market (a monopoly) or because the products in its market are not perfect substitutes (monopolistic competition).

A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products. According to a strict academic definition, a monopoly is a market containing a single firm. In such instances where a single firm holds monopoly power, the company will typically be forced to divest its assets. Antimonopoly regulation protects free markets from being dominated by a single entity.

PURE MONOPOLY

Pure monopoly is a type of market characterized by a single seller or producer, a unique product, with no close substitute, the ability of the seller to ask any price it wishes, entry to the industry completely blocked by legal, technological or economic barriers, and no need for non price actions, except public relations or goodwill advertising.

MONOPOLY UNIQUE PRODUCT

A monopoly exists when a firm is the only producer of a given product. That product is therefore unique to that firm. Such situation is rarely observed because products providing a similar service can usually be found in other industries or regions of the world. The product is unique in the sense that no close substitutes are presently easily available to consumers.

MONOPOLY POWER OVER PRICE

A monopoly has extensive power over the price it may want to charge its customers. The monopolist is sometimes referred to as a price maker. It must be noted, however, that a monopolist does not charge the highest possible price. Instead it charges the price for which its profits are the largest. Moreover, a monopolist does not set a price independently of the volume produced: quite the contrary, price setting is implemented by restricting output.

MONOPOLY ENTRY BARRIERS

Monopoly exists when entry barriers are present; these may be legal, from the ownership of a patent or a copyright, legal, from its appointment as public utility for natural monopolies, technological, from a secret method of production, due to large size, age, or good reputation, stemming from access to a key resource (such as ore), or resulting from unfair tactics or unfair competition.

UNFAIR COMPETITION

Various strategies used by firms to eliminate competitors by forcing them into bankruptcy or preventing new firms from entering the industry, are referred to as unfair competition. They may include drastic underpricing of products, or cornering of a resource market. Most of these tactics have been declared illegal in antitrust legislation.

MONOPOLY NONPRICE ACTION

Since a monopolist is the only firm in the industry, it appears that there is no need for non price action, such as advertising. However, advertising and other non price action are used

as a form of public relations and for the purpose of avoiding customer antagonism.

MONOPOLY DEMAND

The demand of a monopoly is downsloping because the monopoly is the only firm in the market, and demand for most products is price sensitive.

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MONOPOLY MARGINAL REVENUE

Marginal revenue is the additional revenue received for the last unit sold. Since the monopolist can sell one more unit only by lowering the price on all the units sold, the marginal or additional revenue is not constant but decreasing. The marginal revenue is less than price at any quantity. If the demand curve is a straight line, the slope of marginal revenue is twice the slope of the demand curve.

MONOPOLY DEMAND ELASTICITY

The upper portion of the demand curve of a monopoly is elastic, and marginal revenue is positive for this region of output. The lower portion of demand is inelastic, and marginal revenue is negative in that region. It follows that a monopolist would never want to be in the inelastic portion of its demand since it can increase revenues by raising price.

MONOPOLY PROFIT

A monopoly finds its maximum profit by producing at a level of output where marginal revenue equals marginal cost (the intersection of marginal revenue and marginal cost curves). If it produces one less unit a profit is foregone (on the last unit it failed to sell), and if it produces one more unit a decrease in profit is incurred (as the marginal cost exceeds the marginal revenue for that last unit).

MONOPOLY OPTIMUM QUANTITY

The profit of a monopoly is determined by first finding the optimum quantity with the marginal revenue equal to marginal cost rule. After that, the unit price on the demand curve and the unit cost on the average total cost curve are found based on the optimum quantity established first.

MONOPOLY PROFIT GRAPH

The monopoly profit is the difference between total revenue and total cost. Total revenue is represented as a rectangle with price (on the demand curve) as its height, and quantity (determined by MR=MC) as it width. Total cost is a rectangle with average unit cost (on average total cost) as its height, and quantity as its width. The area by which total revenue exceeds total cost is the profit area.

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MONOPOLY LOSS

A monopoly seeks to maximize profits, and is capable of achieving such a goal by controlling price and quantity. However, should customer demand decrease significantly, the monopolist will be content with minimizing loss (in the short run) and may even be forced to close down.

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MONOPOLY SUBOPTIMAL PROFIT

The strategy of a monopoly should be to maximize total profit. Such outcome would not be obtained by maximizing either unit profit, unit price or total revenue. However, in some cases a monopoly may want to use a suboptimal pricing strategy, for instance, to create additional entry barriers or to avoid customer confrontation.

MONOPOLY ECONOMIC EFFECT

A monopoly form of market is highly undesirable for our society because of the sizable loss of productive and allocative efficiency: the price paid is higher than in perfect competition and the quantity is smaller. The monopoly underutilizes the resources for the production of a good wanted by society. The price charged is much higher than the cost of additional resources used. However, economies of scale and technological progress are possible.

MONOPOLY ECONOMIES OF SCALE

In spite of the undesirable economic effect of a monopoly in general, a monopoly may in certain circumstances generate substantial economies of scale, which can be passed on to society in a lower price. The small firms of perfect competition are not large enough to bring about the economies of scale. Such economies of scale are to be found primarily in natural monopolies. Some economists have questioned the existence of this beneficial economic effect.

MONOPOLY TECHNOLOGICAL PROGRESS

Another potential benefit to society from monopoly type firms is that profits are often the motivation for technological progress and investment in new technology is made possible by the presence of these profits. However, monopolies well protected by entry barriers will not need to seek new technology, and if they do, their goal may be to lower costs for additional profits and new entry barriers.

PRICE DISCRIMINATION

Price discrimination exists whenever different prices are charged for the same product and the difference in price cannot be explained by costs.

PRICE DISCRIMINATION CONDITIONS

In order for the price discrimination to be possible, a firm must be a monopoly or have some power over price, be able to segment its market, and be able to prevent cross selling from one market segment to another. Generally, the market segments will have different elasticities.

PRICE DISCRIMINATION EFFECTS

The purpose of price discrimination is to increase the profit of the monopolist. This is achieved by charging a higher price to those customers who are more inelastic. Price discrimination is generally considered harmful to society and an unfair practice. It is declared illegal in the Sherman Act. However, price discrimination is, nevertheless, tolerated in many instances, in part, because it may result in larger overall output, and is occasionally a form of income redistribution.

NATURAL MONOPOLY

Natural monopolies are said to exist in industries where competition is unworkable and would result in costly duplication of fixed capital. Most natural monopolies are public utilities. These are regulated by commissions.

REGULATED MONOPOLY

The major task of the commission regulating a natural monopoly is to set the price (or rate) that the utility is allowed to charge. One method is the fair-return pricing method. The price is set at the point where it is equal to average total cost. The average total cost is allowed to include a market rate of return to make sure that new funds can be attracted for expansion. This practice often results in cost padding by utilities.

REGULATED MONOPOLY SUBSIDY

In a few cases of natural monopolies, a price below average cost is imposed on a utility to require a large output from the firm. The loss incurred by the firm is then offset with a subsidy. This is most often present in transportation companies.

Characteristics of Monopolies

A monopoly is the single seller of a good for which substitutes are not readily available. There should be high barriers to entry; i.e. other firms cannot enter the market easily and provide the good.

Monopolies often are created due to legal barriers. Patent laws grant inventors the exclusive right to produce and sell a product for a period of time (typically 17 years in the United States). Licensing restrictions often limit who is allowed to provide a good or service in a particular geographic area.

In some instances, economies of scale exist so that there is a tendency toward a natural monopoly - one firm can provide the good most efficiently. One traditional example is the distribution of electrical power to a local community. Duplication of power lines within a community would increase overall costs. With natural monopolies, government policy to encourage more entrants may not make sense.

1. Large number of firms:

The number of firms under monopolistic competition is very large. But the size of each firm is very small. The number of buyers is also large. The implication of large number of firms is that each firm produces or sells an insignificant portion of the total output. Hence, it cannot influence the market price by its individual action. Individual firm has not to bother about the reactions of the rival firms. It can follow an independent price and output policy.

2. Product differentiation:

Under monopolistic competition, each firm produces a differentiated product. Products are close substitutes but not perfect substitutes. Products are alike but not equal. For example, Close-up toothpaste is slightly different from Pepsodent toothpaste. Similarly, lux soap is slightly different from Cinthol soap. Monopolistic competition is found in case of toothpaste, toothbrush, toilet soap, washing shop, detergent power, shoes etc. here one product is different from another in the opinion of a consumer. The differences may be real or imaginary but it creates attachment. Product differentiation can be done by two ways. First, differentiating the quality of the product and second, by sales technique. Product differentiation protects market for the individual firms. Under monopolistic competition, consumers prefer one product to another. Here sellers can create demand for their products by skillfully displaying their salesmanship. Effective advertising techniques, attractive showrooms, home delivery system and credit facility, promptness of service and good behavior of the seller are some example of sales promotion.

3. Free entry and exit:

Firms under monopolistic competition are free to join and leave the industry. They produce close substitutes. Each firm is a monopolist regarding its own product. They command a meager amount of resources. Hence, in the event of losses they may easily quit the market. A firm has no control over other firms. There is open competition in the market. Firms may come and go away when they like.

4. Lack of perfect knowledge of the market:

There are innumerable products in the market. Each product is a close substitute of the other. As a result, buyers do not know about the products, their qualities and prices. Similarly, a seller does not know the exact preference of the buyers.

5. Advertisement Cost:

Under monopolistic competition, there are many firms. Products of their firms are not identical but slightly different. Each firm wants to sell larger amount of its own product. So it tries to establish superiority of its own product. Therefore, it makes advertisement. Expenditure on advertisement is known as the selling cost.

Monopoly symbolizes domination over a product to the extent that the enterprise or individual dictates the terms of access and the markets for availability. The term is specific to a seller's market. A similar situation in the buyer's market is referred to as monopsony. It first appeared as an economics-related term in 'Politics' by Aristotle.

A natural monopoly is defined in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a "natural" reason for this industry being a monopoly. It is an extreme imperfect form of market. In ancient times, common salt was responsible for natural monopolies, till the time people learned about winning sea-salt. Regions facing scarcity of transport facilities and storage were most prone to notorious acceleration of commodity prices and uneven distribution of daily-use products and services. The characteristics of monopoly are solitary to the condition generated by intent.

Salient Features of Monopoly

Single Seller

Under monopoly, there is a single producer of a particular commodity or service in the market accruing to a rather large number of buyers. The mono manufacturer may be an individual, a group of partners or a joint stock company or state, being the only source of supply for the goods or services with no close substitute. In this market structure, the firm is the industry and, thus, the market is referred to as 'pure monopoly', but, it is more of a theoretical concept. At times, close substitutes are produced by few manufactures holding a substantial market share and this imperfect form of extreme market is termed as monopolistic competition.

Restricted Entry

Free entry of new organizations in this market arrangement is prohibited, that is, other sellers cannot enter the market of monopoly. Few of the primary barriers, constricting the entry of new sellers are:

Government license or franchise

Resource ownership

Patents and copyrights

High start-up cost

Decreasing average total cost

Homogeneous Product

A monopoly firm manufactures a commodity that has no close substitute and is a homogeneous product. With the absence of availability of a substitute, the buyer is bound to purchase what is available at the tagged price. For instance: there is no substitute for railways as the 'bulk carrier'. Thus, to be the sole seller, in the monopolistic setup, a unique product must be produced.

Full Control Over Price

In a monopoly market, restricted entry constricts competition and the monopolist exhibits full control over the market conditions. The absence of competition spares the monopolizing company from price pressure and grants him the opportunity to charge the product as per his advantage, targeting profit maximizing via predetermined quantity choice. Thus, a monopolist is a 'price maker' and not a 'price taker', wherein he decides the price and the buyers have to accept it. Nevertheless, to evade the entry from new market participants, the company needs to regulate the set product or service price within the paradigms of the Monopoly Theorem.

Price Discrimination

Price discrimination can be defined as the 'practice by a seller of charging different prices from different buyers for the same good or service'. A monopolist has the leverage to carry out price discrimination as he is the market and acts as per his suitability.

Increased Scope for Mergers

Scope for vertical and/or horizontal mergers increase in lieu of control exhibited by a single entity under a monopoly. The mergers efficiently absorb competition and maintain the supply chain management.

Price Elasticity

With regards to the demand of the product or service offered by the monopolizing company or individual, the price elasticity to absolute value ratio is dictated by price increase and market demand. It is not uncommon to see surplus and/or a loss categorized as 'deadweight' within a monopoly. The latter refers to gain that evades both, the consumer and the monopolist.

Lack of Innovation

On account of solitary market domination, monopolies exhibit an inclination towards losing efficiency over a period of time; new designing and marketing dexterity takes a back seat.

Lack of Competition

When the market is designed to serve a monopoly, the lack of business competition or the absence of viable goods and products shrinks the scope for 'perfect competition'.

Being the sole merchant of a eccentric good with no close imitation, a monopoly has no opposition. The demand for turnout induced by a monopoly is the market demand, adhering extensive market control. The incompetence resulting from market dominance also makes monopoly a key type of market failure.

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TASK 2

DIFFERENTIATE THE FEATURES OF PERFECT COMPETITION, MONOPOLISTIC COMPETITION, OLIGOPOLY, AND MONOPOLY. CITE ON RELEVANT EXAMPLES TO SUPPORT YOUR ANSWER.

PERFECT COMPETITION

Perfect competition is a type of market characterized by a very large number of small producers or sellers, a standardized, homogeneous product, the inability of individual sellers to influence price, the free entry and exit of sellers in the market, and unnecessary nonprice actions. Examples of markets in perfect competition are extremely rare.Numerous markets in the retail, service and agricultural sectors approach perfect competition best. But, in the agricultural sector, government support price programs distort the market mechanism. Notwithstanding the lack of good examples, this form of market is important because of a general conviction among economists that it is the best form of market.

Large Number of Small Firms

A perfectly competitive market or industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. This ensures that no single firm can exert market control over price or quantity. If one firm decides to double its output or stop producing entirely, the market is unaffected. The price does not change and there is no discernible change in the quantity exchanged

Identical Goods

Each firm in a perfectly competitive market sells an identical product, which is also commonly termed "homogeneous goods." The essential feature of this characteristic is not so much that the goods themselves are exactly, perfectly the same, but that buyers are unable to discern any difference. In particular, buyers cannot tell which firm produces a given product. There are no brand names or distinguishing features that differentiate products by firm.

Perfect Resource Mobility

Perfectly competitive firms are free to enter and exit an industry. They are not restricted by government rules and regulations, start-up cost, or other barriers to entry. While some firms incur high start-up cost or need government permits to enter an industry, this is not the case for perfectly competitive firms. Likewise, a perfectly competitive firm is not prevented from leaving an industry as is the case for government-regulated public utilities.

Perfect Knowledge

In perfect competition, buyers are completely aware of sellers' prices, such that one firm cannot sell its good at a higher price than other firms. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price. Perfect knowledge also extends to technology. All perfectly competitive firms have access to the same production techniques. No firm can produce its output faster, better, or cheaper because of special knowledge of information.

MONOPOLISTIC COMPETITION

Monopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one another (that is, the products are substitutes, but, with differences such as branding, are not exactly alike). In monopolistic competition firms can behave like monopolies in the short-run, including using market power to generate profit. In the long-run, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like perfect competition where firms cannot gain economic profit. However, in reality, if consumer rationality/innovativeness is low and heuristics is preferred, monopolistic competition can fall into natural monopoly, at the complete absence of government intervention. At the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition was Edward Hastings Chamberlin in his pioneering book on the subject Theory of Monopolistic Competition (1933).Joan Robinson also receives credit as an early pioneer on the concept.

Large Number of Small Firms

A monopolistically competitive industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. This ensures that all firms are relatively competitive with very little market control over price or quantity. In particular, each firm has hundreds or even thousands of potential competitors.

Similar, But Not Identical Goods

Each firm in a monopolistically competitive market sells a similar product. Yet each product is slightly different from the others. The term used to describe this is product differentiation. Product differentiation is responsible for giving each monopolistically competitive a little bit of a monopoly, and hence a negatively-sloped demand curve. Differences among products generally fall into one of three categories:

(1)physical difference,

(2)perceived difference,

(3)difference in support services.

Resource Mobility

Monopolistically competitive firms, like perfectly competitive firms, are free to enter and exit an industry. The resources might not be as "perfectly" mobile as in perfect competition, but they are relatively unrestricted by government rules and regulations, start-up cost, or other substantial barriers to entry. While some firms incur high start-up cost or need government permits to enter an industry, this is not the case for monopolistically competitive firms. Likewise, a monopolistically competitive firm is not prevented from leaving an industry as is the case for government-regulated public utilities.

Extensive Knowledge

In monopolistic competition, buyers do not know everything, but they have relatively complete information about alternative prices. They also have relatively complete information about product differences, brand names, etc. Moreover, each seller also has relatively complete information about the prices charged by other sellers so that they do not inadvertently charge less than the going market price.

OLIGOPOLY

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). A general lack of competition can lead to higher costs for consumers. Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Oligopoly is a common market form. As a quantitative description of oligopoly, the four-firm [concentration ratio] is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. For example, as of fourth quarter 2008, Verizon, AT&T, Sprint, and T-Mobile together control 89% of the US cellular phone market.

Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development.[citation needed] There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other.

These three characteristics underlie common oligopolistic behavior, including interdependent actions and decision making, the inclination to keep prices rigid, the pursuit of nonprice competition rather than price competition, the tendency for firms to merge, and the incentive to form collusive arrangements.

Small Number of Large Firms

The most important characteristic of oligopoly is an industry dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This characteristics gives each of the relatively large firms substantial market control. While each firm does not have as much market control as monopoly, it definitely has more than a monopolistically competitive firm.

The total number of firms in an oligopolistic industry is not the key consideration. A oligopoly firm actually can have a large number of firms, approaching that of any monopolistically competitive industry. However, the distinguishing feature is that a few of the firms are relatively large compared to the overall market. A given industry with a thousand firms, for example, is considered oligopolistic if the top five firms produce half of the industry's total output.

The hypothetical Shady Valley soft drink market contains 20 firms, but it is oligopolistic because the four largest firms account for over 60 percent of total industry sales and the top eight firms account for almost 80 percent.

Identical or Differentiate Products

Some oligopolistic industries produce identical products, like perfect competition in this regard, while others produce differentiated products, more like monopolistic competition. This characteristic might seem to be a bit wishy-washy, taking both sides of product differentiation issue. In actuality it points out that oligopolistic industries general come in two varieties.

Identical Product Oligopoly:

This type of oligopoly tends to process raw materials or produce intermediate goods that are used as inputs by other industries. Notable examples are petroleum, steel, and aluminum.

Differentiate Product Oligopoly:

This type of oligopoly tends to focus on goods sold for personal consumption. The key is that people have different wants and needs and thus enjoy variety. A few examples of differentiated oligopolistic industries include automobiles, household detergents, and computers.

Barriers to Entry

Firms in an oligopolistic industry attain and retain market control through barriers to entry. The most noted entry barriers are:

(1) exclusive resource ownership

(2) patents and copyrights

(3) other government restrictions

(4) high start-up cost.

Barriers to entry are the key characteristic that separates oligopoly from monopolistic competition on the continuum of market structures. With few if any barriers to entry, firms can enter a monopolistically competitive industry when existing firms receive economic profit. This diminishes the market control of any given firm. However, with substantial entry barriers found in oligopoly, firms cannot enter the industry as easily and thus existing firms maintain greater market control.

Consider the hypothetical oligopolistic Shady Valley athletic shoe market dominated by Omni Run, Inc. and The Master Foot Company. Each of these firms has produced athletic shoes for several years. They have well-known brand names, state-of-the-art factories that provide economies of scale for large volumes of production, and a few patents on how their shoes are made. Any firm seeking to enter this market is faced with significant barriers.

First, a new firm must compete with the established Fleet Foot and Omni Fast brand names. At the very least, this requires a substantial amount of expensive upfront advertising and promotion. Second, a new entry has to construct a new factory. With limited initial sales, this new firm in the market will be unable to take full advantage of decreasing short-run average cost or long-run economies of scale. Third, any new firm has to devise its own production techniques to compete with the patented techniques used by Omni Run and Master Foot.

MONOPOLY

In economics, the idea of monopoly is important for the study of market structures, which directly concerns normative aspects of economic competition, and provides the basis for topics such as industrial organization and economics of regulation. There are four basic types of market structures by traditional economic analysis: perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a structure in which a single supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. This is termed monopolistic competition, whereas by oligopoly the companies interact strategically.

In general, the main results from this theory compare price-fixing methods across market structures, analyze the effect of a certain structure on welfare, and vary technological/demand assumptions in order to assess the consequences for an abstract model of society. Most economic textbooks follow the practice of carefully explaining the perfect competition model, only because of its usefulness to understand "departures" from it (the so-called imperfect competition models).

The boundaries of what constitutes a market and what doesn't are relevant distinctions to make in economic analysis. In a general equilibrium context, a good is a specific concept entangling geographical and time-related characteristics (grapes sold during October 2009 in Moscow is a different good from grapes sold during October 2009 in New York). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of grapes in Russia, for example, which is not a market in the strict sense of general equilibrium theory monopoly

Characteristics

Profit Maximizer:

Maximizes profits.

Price Maker:

Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm.

High Barriers to Entry:

Other sellers are unable to enter the market of the monopoly.

Single seller:

In a monopoly, there is one seller of the good that produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.

Price Discrimination:

A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.

The table below shows a summary of market structures , comparing them along with their characteristics: 

Characteristic

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Number of firms

Very Many

Many

Few

One

Type of Product

Homogeneous

Differentiated

Homogeneous / Differentiated

Only product of its kind

(no close substitute)

Ease of entry

Very easy

Relatively easy

Not Easy

Impossible

Price Setting power

Nil 

(Price taker)

Somewhat

Limited

Absolute

(Price Maker)

Non Price Competition

None

Considerable

Considerable for a differentiated oligopoly

Somewhat

Productive efficiency

Highly efficient

Less Efficient

Less Efficient

Inefficient

Long run profits

0

0

Positive

High

Examples

Doesn't Exist; agriculture close

Fast Food, retails stores, cosmetics

Cars, Steel, soft drinks, cereals

Small town newspaper, rural gas station

Market Structure comparison

Number of firms

Market power

Elasticity of demand

Product differentiation

Excess profits

Efficiency

Profit maximization condition

Pricing power

Perfect Competition

Infinite

None

Perfectly elastic

None

No

Yes

P=MR=MC

Price taker

Monopolistic competition

Many

Low

Highly elastic (long run)

High

Yes/No (Short/Long)]

No

MR=MC

Price setter]

Monopoly

One

High

Relatively inelastic

Absolute (across industries)

Yes

No

MR=MC

Price setter]

CONCLUSION

The study of microeconomics reveals how both consumers and businesses make financial decisions. Although a variety of impulses and imperatives drive these decisions, a principal determinant for the consumer is price, and for business the supply-demand factor as it relates to pricing and output.

There are also other elements that influence financial decision making, some simple, some complex, all of which were described in the preceding sections, and all of which ripple through the economy at large.

The great lesson of microeconomics is how individual decision making can be described in certain mathematical formulae, may be predicted with reasonable accuracy, and how each of these individual choices, both consumer and business, when multiplied many million-fold create the economic conditions in which we live.