Consider competitive markets, monopolies, and oligopolies. What role does each of these play in an economy? o What are the characteristics of each market structure?
o How is price determined in each market structure in terms of maximizing profits?
o How is output determined in each market structure in terms of maximizing profits?
o What are the barriers to entry, if any?
o What role does each market structure play in the economy?
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. [ Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets. In economics, a monopoly (from Greek monos / µ???? (alone or single) + polein / p??e?? (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a single entity's control over a market to purchase a good or service, and contrasted with oligopoly where a few entities exert considerable influence over an industry)[clarification needed] Monopolies are thus characterised by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb "monopolise" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). The word is derived, by analogy with "monopoly", from the Greek ?????? (oligoi) "few" + p??e?? (polein) "to sell". 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. It decides by comparing the marginal revenue brought in by an additional unit of a factor of production compared to its marginal cost. If the marginal revenue is above marginal cost, then it decides to continue demanding the factor of production. ] Note:
Maximizing Profits in Market Structures
Competitive markets, monopolies, and oligopolies play a big role in the economy. [ We will be discussing the characteristics, price determination, output determination, barriers to entry, and the role in economy of each market structure.
In a competitive market there are many firms that supply the same product, such as local gas stations. Mankiw (2007) stated, “You may recall that a market is competitive if each buyer and seller is small compared to the size of the market and, therefore, has little ability to influence market prices” (p. 289). A firm has market power when it is capable of influencing the market price. In a competitive market, the market determines the price the sellers will charge. Mankiw (2007) stated, “In particular, if firms are competitive and profit maximizing, the price of a good equals the marginal cost of making that good” (p. 306). If the seller charges less than the market price, they may sell more. If they raise ] Note:
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