PRBE00 - Economics for Managers | Essay

Running Head: ECONOMICS FOR MANAGERS 1
Assessment 2: Research Essay
Following the guidelines of the course ID guidelines
Student’s Name
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ECONOMICS FOR MANAGERS 2
Introduction
In the study essay, key features of four market structures i.e. monopoly, oligopoly,
monopolistic competition, and the perfectly competitive market have been described. Using
diagrams, the short run and long run profits and losses in the identified market structure is also
elaborated (O'Sullivan, 2009). Also, the allocation of resources in the four types of markets has
been compared. Furthermore, the study paper provides a brief description of negative
externalities using the diagram. Providing a case study from Australia, the impact and
government interventions have been identified to solve the problem of a negative externality.
Lastly, the study investigates the effect of externality on monopoly and perfectly competitive
market outcomes in the presence of negative externalities.
Question 1: Four Market Structure
Monopoly
In a monopoly market structure, a single manufacturer or seller has the control over the
market as no close substitute is available (Abdin, 2008). Therefore, the single firm is called
monopolistic. As the single supplier produces products having no close substitute, the
monopolistic firm can be termed as the price maker. In other characteristics, due to lack of close
substitutes and infrastructural assistance, entry to the market is restricted for new participators.
Non-price competition in monopoly market is somewhat in compared to other market structure
whereas the market structure is efficient in terms of productive efficiency (Carlton, 2012). The
identified market structure secures high profitability in the longer period of time. For instance,
rural gas station can be identified as a monopolistic firm as there are no other market competitors

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(Baur, 2017). In the underlying figure, the long-term and short-term economic profits of
monopoly market structure have been illustrated as follows:
Figure: Monopoly Long-run and Short-run Economic Profit
Source: (Prescott, 2013)
In a monopoly market structure, super-normal profitability can be achieved in the long-
term. In case of profit maximisation, marginal cost must be equal to marginal revenue
considering the competition. In case of monopolistic market structure, competition is nil. As
shown in the figure, profit maximisation is achieved when MC=MR, where P is price and output
is Q. Given at a price AR is above ATC at point Q, PABC area can indicate the supernatural

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profit (Prescott, 2013). Precisely, no presence of close substitute and competition, a monopolistic
firm can secure maximum profit at area PABC in the long run.
Monopolistic Competitive market
Monopolistic competitive market structure forms an imperferct competiton where many
producers have offfered products or services differentiated by brinading ,design, or quality.
Clearly, the offered products are not perfected substituables by each other (Brems, 2013). In a
monopolistic competiton, the number of competitors are many but not as high as perfect
competiton. In terms of control over the price, firms have got some control on prices whereas the
entry to the market is relatively easy (Feenstra, 2010). In the monopolistic competition,
production factors of manufactured goods/service are not absolutely transportable. Apparently, in
sich market structure, more elastic demand curve can be seen as the manufacturers reduce price
of goods/service to incresae sales. In the meanwhile, long-run profits for such market structure is
nil (Feenstra, 2016). Invariably, retail stores and coffee shop businesses are examples of real life
monopolistic competition. In the next section, the short-run economic profits and losses of
monopolistic competiton have been described.

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Figure: Short-run Economic Profit in Monospolistic Competition
Source: (Brems, 2013)
In a monospolistic competition, firms engaged in the market structure maximises profits
by manufacturing that partcilar quantity so that MR and MC will be equal in the short-run.
Considerably, to achieve the economic proft in short-term, the avarage total cost must be below
the market price. As described in the above graph, D is market demand, ATC is avarage total
cost, MR is marginal revenue, and MC is marginal cost. As shown in the graph, the price offered
by monomistic competitive enterprise is identical to the point on D where MR=MC. Therefore,
the short-tern profit will be the difference between price and avarage total cost multiplied by
quantity.

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Figure: Short-run Economic Loss in Monospolistic Competition
Source: (Brems, 2013)
In case of short-run losses, if ATC is above market price as shown in the above figure,
the firm suffers loss. The short term loss will be the difference between price and avarage total
cost multiplied by quantity. As the avarge total cost will be negative, the figure will show loss.
However, in a monopolistic market structure firms can minimise the loss in short run by
manufacturing the quantity where MR is equal to MC (Keppler, 2014). In that particular case, the
firm need to convest the loss in profit or should exit the market.