...UNDERSTANDING MARKET STRUCTURES Bart Ford XECO 212 Jan. 15, 2012 Dr. Jill Trask Abstract Before someone can identify how to maximize profits in different market structures they must first understand how those markets operate and the characteristics of each. This paper will identify three market structures monopoly, oligopoly, and competitive structures and explain each in detail, as they pertain to maximizing profits, how price is determined for goods, how output of goods is determined, barriers of entry into each market, and the role that each market plays in the economy. UNDERSTANDING MARKET STRUCTURES A monopoly structured market consists of one provider for a particular good or product. A monopoly exists when one firm controls a specific resource, such as diamonds. Diamonds are very rare and scarce as a resource, subsequently if one firm were to control the vast resource of diamonds they would inevitably control the market sale of diamonds. In this way, the diamond firm would be able to set the price for diamonds at whatever they wished. Also, by doing this the firm can look into ways to cut costs related to gathering the diamonds for sale. The firm could cut back on labor costs and only use minimal amounts of labor because they can control the output during any and all stages of the production phases. Barriers of entry into the monopolistic structure are great, and include: exclusive patent rights, extremely high initial start-up costs, economic, social...
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...------------------------------------------------- Supply and demand The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product. Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an equilibrium of price and quantity. The four basic laws of supply and demand are:[1] 1. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity. 2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity. 3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity. 4. If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity. ------------------------------------------------- The graphical representation of supply and demand The supply-demand model is a partial equilibrium model representing the determination of the price of a particular good and the quantity of that good which is traded. Although it is normal...
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...Market Structures Name XECO/212 Date Instructor The three important market structures in economics are competitive markets, monopolies, and oligopolies. Each market plays a different role in the economy. Competitive markets are when no firm has the power to affect the market price of a good and “many buyers and sellers trading identical products so that each buyer and seller is a price taker” (Mankiw, 290). A monopolistic market is when a specific person or enterprise is the only supplier of a certain good. An oligopoly is a market in which a good has only a few “similar or identical” (Mankiw, 346) products for sale. There are three characteristics of a competitive market: “There are many buyers and many sellers in the market, the goods offered by the various sellers are largely the same, and firms can freely enter or exit the market” (Mankiw, 290). Because of this, Competitive markets determine the price in terms of “maximizing profits, which equals total revenue minus total cost” (Mankiw, 292). Total revenue is calculated by multiplying price by quantity. Output is determined in a competitive market in terms of maximizing profits by following three general rules: “If marginal revenue is greater than marginal cost, the firm should increase its output, if marginal cost is greater than marginal revenue, the firm should decrease its output, and at the profit-maximizing level of output, marginal revenue and marginal...
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...Kirzner on Supply and Demand The law of supply and demand describes how prices will vary based on the balance between the supply of a product and the demand for that product (Wikipedia, 2005). If there is a balance between the supply, (the availability of the product), and the demand, (how much product the consumers want), then the price for the product would be considered good. If there is an imbalance, the price will change. According to Adam Smith, the invisible hand is a self-adjusting force in the market that corrects the price of a product through supply and demand (Colander, 2006). When a product is in short supply and there is significant demand for the product, the price will increase (Colander, 2006). When the quantity of the product is greater than the demand, the price will decrease (Colander, 2006). This assumes there exist a competitive marketplace. This process of price variability based on the supply of a good and the demand for it will continue until a balance is once again reached (Wikipedia, 2005). At that point, equilibrium is said to be established between the supply and the demand. Kirzner (2000) commented: "The theory of supply and demand is recognized almost universally as the first step toward understanding how market prices are determined." Furthermore, this theory also explains how the price of a product shapes production and consumption decisions (Kirzner, 2000). Scarcity means there is less of something than is demanded or wanted...
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...resources. Explain how resources are allocated in a free market economy? Scarcity is the availability of resources in limited amounts relative to unlimited nature of human wants that the resources are meant to satisfy. According to Richard G Lipsey It is the basic economic problem that is arises because people have unlimited wants and limited resources. Because of scarcity the economic decision must be made to allocate resources efficiently. When we talk of scarcity within an economic contest, it refers to limited of resources not lack of riches. These resources are the inputs of production land, labour and capital. People must make choices between different items because resources necessary to fulfil their wants are limited. These decisions are given up on want to satisfy another. Market economy enables mutual beneficial between producers and consumers and relies on markets to solve the economic problem, is called market economies. In a free market economy, resources are allocated through the market of free and directed forces of markets. This means that what to produce is determined by the consumers, how to produce is determined by producers and who gets the product is determined by the purchasing power. Markets economies work by allowing the direct interaction of consumers and producers who are pursuing their own interest. The pursuit of self interest is at the hand of free market economy In a free market economy resource allocation is determined by the price mechanism. I.e....
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...means availability in amounts less than sufficient to satisfy all wants or desires. The test for scarcity is price hence only goods that are not scarce command a price.Therefore economists try to explain how this economic problem is solved by different economic systems. There are three economic systems that exist in the world today that is the free market, command and mixed economy. These economic systems have different ways in which they try to answer the fundamental economic questions of “What? How? And for whom to produce for? Samelson and Nordhaus define a market economy as an elaborate mechanism for cording people, activities and business through the a system of price and markets. Production is mainly driven by the market forces of demand and supply, which determine price hence it is termed as the price mechanism. The USA is an example of what can be simply classified as a market economy. Thus by matching sellers and buyers in each market, the three fundamental questions of what? How?, for whom?. Consumers determine what goods and services will be produced by their dollar votes, which means their daily purchasing decisions. Firms in the market economy are profit motivated therefore they abandon areas where they are losing profits and lured by high profits into production of goods in high demand. The question of “How” goods and services are produced is determined by the competition among different producers. Hence the best way for firms to remain competitive in the market...
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...the study of how human organize needs and wishes, particular the decision-making mechanisms, social way of life, and political realities of the world (Colander, 2010). Macroeconomics is the study of the economy. It reflects on the issues of inflation, unemployment, business cycles, and growth (Colander, 2010). What happens where there is a surplus of imports brought into the U.S.? If there is a surplus of imports brought into the United States, impacts businesses and consumers. When imports are brought in that consist of goods and services, the cost of the goods will decrease and it will then create a balance of trade deficit. When imports are brought into the United States, the demand will decrease of U.S. goods and services. A specific example of a product with an import surplus is buying a house and trying to get the seller to reduce the price by $10,000. It would be simpler if the seller just sold the house at the price they are asking because the current buyer is not willing to pay full price. What are the effects of international trade to GPD, domestic markets and university students? How do government choices in regards to tariffs and quotas affect international relations and trade? What are foreign rates? How are they determined? Foreign Rates are a conversion rate of one currency into another. The foreign rate can be analyzed by the local demand of foreign currencies of their supply and the demand model in the same form as another good can be (2010...
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...(ii) normal good and (iii) inferior good. 3 3. Explain the effect of ‘input price changes’ on the supply of a good. 3 4. Explain the relation between marginal revenue and average revenue. 3 5. Draw Average Total Cost, Average Variable Cost and Marginal Cost curves in a singlediagram. 3 For Blind Candidates only in lieu of Q. No. 5 When is supply of a commodity said to be (i) elastic, (ii) inelastic and (iii) perfectly inelastic ? 6. Price of a good rises from Rs. 10 per unit to Rs. 11 per unit. As a result quantity demanded of that good falls by 10 percent. Calculate its price elasticity of demand. 4 OR A consumer buys 70 units of a good at a price of Rs. 7 per unit. When price falls to Rs. 6 per unit, he buys 90 units. Use Total Expenditure Method to find whether the demand for the good is elastic or inelastic. 7. Give meanings of (i) marginal physical product, (ii) fixed cost, (iii) variable cost, and (iv) total revenue. 4 8. Calculate Marginal Cost and Total Cost from the following Cost Schedule of a firm whose Total Fixed Costs are Rs. 15 : 4 Output Total Variable Cost (Unit) (Rs.) 1 10 2 19 3 29 4 40 9. How is the equilibrium price of a good determined ? Explain with the help of diagram a situation when both demand and supply curves shift to the right but equilibrium price remains the...
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...supply is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity. The four basic laws of supply and demand are: ➢ If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity. ➢ If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity. ➢ If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity. ➢ If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity. GRAPHICAL REPRESENTATION OF DEMAND & SUPPLY [pic] The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product. DEMAND SCHEDULE A demand schedule, depicted graphically as the demand curve, represents the amount of some good that buyers are willing and able to purchase at various prices, assuming all determinants of demand other than the price of the good in question, such as income...
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...----------------------------------------------------- 3 RATIONALE FOR NOMINAL GDP TARGETING IN INDIA ------------------------------------------------ 3 Introduction Inflation is increased money supply, and often causing a sustained increase in the general price level of goods and services in an economy over a period of time by "Too much money chasing too few goods", as common acknowledge by modern people. Inflation is of primarily four types – hyperinflation, disinflation, deflation and stagflation. Hyperinflation involves high growth of money supply i.e. in multiples of 100 and usually occurs when central bank is involved in excess money printing. Disinflation involves inflation that is growing at a decreasing rate. Deflation or negative inflation is decrease in money supply. Stagflation occurs when high growth in prices coincides with decelerated growth and unemployment. Inflation is measured using indices namely, CPI (determined by current price of fixed basket of goods at retails shops), WPI (determined by current price of fixed basket of goods at wholesale shops) and GDP deflator( determined by growth in GDP in real terms). India has shifted from WPI to CPI. Inflation either occurs due to increase in demand which causes both price level and output to increase (demand pull) or due to increase...
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...services. In order to produce and sell goods or services firms need to be contained within a market structure. There are different market structures in the economy such as competitive markets, monopolies and oligopolies. Each different market structure has a different way to determine the price of a product in order to maximize its profit. Market structures also need to indicate the degree in which they will produce their output of products to reach the highest level of profitability. Maximizing profits in different market structures possibly could raise different barriers as each structure plays a different role in the economy. The competitive market or in other words can be known as a perfectly competitive market can have numerous buyers and numerous sellers in the market and goods are accessible to consumers by a large number of sellers which are generally the same. In this type of market different firms can enter or exit the market freely because there is either an easy level of demand required by consumers or because an entrepreneur simply wants to enter into the selling of a product produced within the market. This means that the arrangements of any one supplier or purchaser in the market have an insignificant impact on the market price of the product of that, which is current. Consumers in the competitive market are said to be price takers because they must accept the current price that has been determined by the market for that particular good. This means that there are many...
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...types of goods and services to produce, the amount to produce, the prices and where to distribute them. The government (or the centralized planner) also owns the land, factories, and machines and decides how the goods and services will be produced. The government decides who will work where, and what machines and raw materials will be available to them. Finally, by establishing the pay and benefits available, it also decides for whom the goods and services will be produced. Through this system, a fairer distribution of income may be achieved, unemployment reduced/eliminated, and the assurance of production of socially useful products. However, unpopular decisions about the future may be made, unrealistic/ inaccurate estimates may be made thus resulting in over production or underproduction of certain items in the market. Market System A market economy relies heavily upon the market forces to determine the prices and quantities of goods, and the allocation of goods and resources. The higher the demand for certain goods, the higher the prices will be. Businesses will produce/supply the goods and services that are in demand because they are motivated by profits. What to produce is determined by the dollar votes of consumers. How to produce is determined by competition in the market. Competition leads to the discovery of cheaper production methods. Consumers reward the producers, who provide them with goods and services they want at competitive prices, by buying goods and services...
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...opportunity costs are:Opportunity cost is the benefit that you might have gained from choosing the next-best alternative . • Know the definition of economics (Micro and Macro):Microeconomics is the study of individual choice, and how that choice is influenced by economic forces. Macroeconomics is the study of the economy as a whole. It considers the problems of inflation, unemployment, business cycles, and growth. • Know what the invisible hand is:The invisible hand is the price mechanism, the rise and fall of prices that guides our actions in a market . • Know about mergers:a statutory combination of two or more corporations by the transfer of the properties to one surviving; corporation any combination of two or more business enterprises into a single enterprise; an act or instance of merging. • Know about patents :A patent is legal protection of a technical innovation that gives the person holding it sole right to use that innovation —in other words, it gives the holder a monopoly to produce a good. • Know excise taxes and tariffs:An excise tax is a tax that is levied on a specific good . The luxury tax on expensive cars that the United States imposed in 1991 is an example. A tariff is an excise tax on an imported good . • Know what sunk costs are:A marginal cost is the additional cost to you over and above the cost s you have already incurred . That means not counting sunk costs — costs that have already been incurred and cannot be recovered...
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...INTRODUCTION Objective The general objectives of this study are to describe recent trade problems and examine why these problems are related to, and affected by exchange rates. The study first examines the exchange rate and how it is determined. The study will explore, in detail, the agencies that determine these rates. This study will also present the pros and cons of different prices of goods and services in different countries. Specifically, this paper: (1) defines recent trade problems and how they are affected by the exchange rate; (2) describes the steps taken within the agencies that determine the exchange rates; (3) examines the impact of these rates, both good and bad; (4) analyzes the costs of similar goods in the U.S. and in foreign markets; (5) discusses the pros and cons of the exchange rate and how it affects trade; (6) examines various exchange rate systems: floating, fixed, and dirty floating. Limitations of the Study The topics of exchange rate and trade both have a variety of factors that cause changes. As with any study that attempts to explore current developments in the economy, it is hard to keep information current. It is also virtually impossible to report on the status of every single government that is involved in the exchange market. One of the limitations of this study is to report on up-to-date values of currency while choosing a sample of governments...
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...SIMULATION Supply and Demand Simulation University of Phoenix ECO 365 Introduction A number of factors, including price increases or decreases, cause changes in supply and demand. An incremental decrease in the rental price led to a huge increase in the demand for houses. Similarly, an increase in the rental price of two roomed apartments caused a decrease in the demand of houses by a significant margin. Suppliers were willing to supply more houses at higher prices and fewer ones at reduced rents (McDowell et al., 2006). A rise in the population of Atlantis led to a greater demand for housing which in turn contributed to the rise in rental prices as demand-outstripped supply. As a consequence, the suppliers were eager to supply more units at improved rental prices. When the population decreased, the demand for housing fell and the available units were leased out at low prices. Naturally, the suppliers were not very keen to supply all their units to the market at depressed prices. Available substitutes affect the demand and supply of a commodity. A number of people in Atlantis owned homes in the suburbs and did not need to rent houses in the town. The demand for houses dropped and this forced the suppliers to cut back on supply or reduce rents in bid to attract more clients. Consumer tastes and preferences affect the supply and demand of goods and services in the market (McDowell et al., 2006). When consumer trends shifted from two roomed apartments to detached...
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