Market Structures and Price Determination

This assignment delves into the concept of market equilibrium, where the price and quantity on which sellers agree to sell and buyers are willing to buy are determined. The analysis considers various market structures - perfect competition, monopolistic competition, monopoly, and oligopoly - and how they affect prices in the market. It also examines factors influencing commodity prices and discusses the impact of supply and demand curves on market dynamics.

Economics in business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Demand Supply and Pricing............................................................................................................1
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................8
.......................................................................................................................................................10

INTRODUCTION
Demand and supply are the key factors affecting the change in the price of a product of a
company. If the demand of a product is high and there is low supply of that product than the
price of the product will rise and on the other hand if the demand of a product is low and high
supply than the price of that product will decline. This report includes analysis of demand and
supply which are the main factors in determining the price of Polo Mints in UK. It also includes
shift in demand curve and there effect on the quantity, shift in supply curve and its effect on
quantity supplied. The market structures- monopolistic market, monopoly market, oligopoly
market and perfect competition. And the impact of market structures on the determination of the
price of a product by the forces of demand and supply. The factors affecting the price of a
commodity and its supply and demand.
MAIN BODY
Demand Supply and Pricing
The law of demand states the inverse relationship between price and quantity demanded
that when there is rise in price there is fall in the quantity demanded and vice versa . And the law
of supply states that when there is when price increases than the supply also increases and vice
versa. Price is a value of the product which a seller determines by the various market forces and
the market competition. The price includes the cost incurred in manufacturing the product and
the profit margin of the seller. Also the buyer is willing to pay the specified price by the seller in
order to satisfy his needs(Auer and Schoenle, 2016).
Shift in Demand Curve
There is a shift in demand curve being the price of the product remains constant the
demand curve shifts through various factors that are -income of the buyer,taste and preferences,
expectations of future prices and the price of related goods. If there is a slight change in any of
the factors there will be change in the quantity demanded by the consumers in the market.
Demand curve can be shifted to the right when there is increase in demand and the price
remaining the same. Also the demand curve shifts to the left when there is decrease in demand of
a particular product at a constant price of the product (Haaland and Venables, 2016).
Increase in Demand -
As the demand for a product increases by the factors other than the price of a product
than there will be rightward shift in the demand thereby increasing the quantity demanded by the
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customer at a constant price. Demand for a product increases by the factors like income of the
customer like if the income of the customer rises there will be increase in demand of the product
and the customer tends to consume more also when the price of substitute goods increases the
consumer is more likely to purchase the product of lower price. In the illustration 1 there is
rightward shift in the demand curve from D to D1 which results in increase in the quantity
demanded from Q to Q1 but the price remaining the same as P(Nikaido, 2015).
Decrease in Demand-
when the demand decreases through the factors like taste and preferences of the
customers and fall in prices of the related goods that is if the price of the substitute goods
decrease than the demand for this product decreases and this will result in the leftwards shift in
the demand curve. Through the shift in demand curve there is reduction in the quantity
demanded by the product by the customers. In the illustration 1 there is shift in the demand
which is from D to D2 which is a leftward shift. It results in the decrease in quantity demanded
of the product from Q to Q2.
Illustration 1: Shift in demand curve
(Source:Shift in Demand Curve:
Increase and Decrease |
Microeconomics,2019)
Shift in Supply Curve
The supply of commodity by the supplier can be increased or decreased even without the
change in the price of the commodity. The change in supply can be from the various reasons like
the use of new technologies by the company which reduces the cost of the production and
increases the quantity produced in the market at the same price level. The supply can increase or
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decrease according to the change by the other factors which in turn effects the quantity of the
product. Thus the change in supply where price remaining the same causes the shift in the supply
curve(Ozdemir, 2016).
Increase in supply-
When there is increase in the quantity supplied and price remaining the same there is shift
in the supply curve in rightward direction. The quantity supplied is increased by the favourable
changes in the production of the product. These changes can be technological changes,decrease
in tax and favourable climatic conditions. There is shift in supply curve from S to S2 and the
quantity supplied from Q to Q2.
Decrease in supply-
When there is decrease in the quantity supplied where price remaining the same there is
shift in the supply curve in the left direction. These changes are non favourable changes like
increase in the tax rate and increase in the cost of factors of production. These changes results in
the decrease in the supply of quantity supplied. There is shift in supply curve from S to S1 and
the quantity supplied from Q to Q1(Auer and Schoenle, 2016).
Illustration 2: Shift in Supply Curve
(Source:Movement along a Supply
Curve and Shifts in Supply
Curve,2018)
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The demand and supply forces are responsible to change the price of a product considering the
market as a whole. This relation between demand supply and price are defined by the
equilibrium point of the product market. Equilibrium is the point where demand and supply
curve meets which indicates that at a certain equilibrium point. This point of equilibrium
determines the price of a that product. a consumer is willing to buy a equilibrium quantity at a
equilibrium price . And also the supplier is ready to sell their goods at the equilibrium price.
When the demand of a product increases and the supply of the product remains unchanged than
the equilibrium price is higher of(Haaland and Venables, 2016). When the demand of a product
decreases and the supply remains constant than the price of product will be lower. Also when
there is increase in the supply of the product and the demand remains unchanged than there will
be lower equilibrium price and on the other hand when the supply of a product decreases and
demand remains unchanged there is higher equilibrium price of a product. The following
diagram shows the equilibrium price and the equilibrium quantity demanded at the given level of
demand and supply by the consumers and sellers. P is the equilibrium price and Q is the
equilibrium quantity given the demand and supply curve(Nikaido, 2015). Thus the price of a
product is likely to be changed with the change in supply and the demand of a product of Polo
Mints.
Illustration 3: Market Equilibrium
(Source: How does supply and demand
affect prices on the market,2016)
Also there are factors like taste, preferences, substitute goods , durability of product and
natural disasters which can also effect the price of a product other than demand and supply forces
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and the equilibrium point. As the taste and preferences effect the demand of the commodity
which thereby effects the supply of the commodity. If there is a substitute of the commodity and
another option is available than there will be less demand and the price of the commodity will
decrease accordingly. Inducement of the new technology helps in the increase supply of the
commodity at same price and at same demand level(Nikaido, 2015). If the product is durable
than the demand for the product is less and supply being constant lowers the price of the product.
In the perfect competition market the prices of the commodity are already fixed and there
is no change in the price of a commodity for the single buyer or the single seller. The commodity
which is sold in the perfect competition market are homogeneous and of same nature. There is no
excessive demand and no excess of supply of commodity which creates a balance between
demand and supply by the sellers and buyers(Auer and Schoenle, 2016). The price of a
commodity is determined by these market forces and not by the individual seller. As the firm is
not responsible to fix the price of the product therefore the firm is the price taker and not the
price maker. There are no barriers to entry and exit in the market. If firms are making losses than
it can leave the market as there is no barriers on the exit from the market. The illustration shows
the market under perfect competition the price is determined by the intersection of demand curve
and supply curve and point P denotes the price of the product (Nikaido, 2015). Therefore if Polo
Mints in UK is in the perfect competition market than the market forces that are demand and
supply will decide the price of the product of the company if the Polo Mints increases the price
of product than the company will suffer as no customer will buy the products at high cost.
Illustration 4: Perfect competition market
(Source:PERFECT COMPETITION,2013)
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In the monopolistic market the products sold by the suppliers are different and the buyers
have less choices in the purchasing the product. The suppliers of the product are the price maker
and not the price taker. There is free entry and exit in the market .The price of the commodity is
not fixed by the market forces of supply and demand. The price of product is determined by the
seller through evaluating its cost and adding to it the profit. The seller in this market can change
the price of product and it will have lesser effect on the demand of that commodity because there
exist no close substitutes to that product(Auer and Schoenle, 2016). The seller of the commodity
fixes the price according to his cost incurred. Also if the firm have its brand image in the market
than the change in price can least effect the demand of the product. In the illustration shows the
short run profit and the price determined by the company.Thus if the company Polo Mints is in a
monopolistic market structure, it can fix the prices by its own and not by the market forces. As
the company owns a brand image and there is no close substitute to the product of Polo Mints, it
can increase the price product and there will lesser change in the demand of the product(Nikaido,
2015).
Illustration 5: Monopolistic
competition
(Source:Monopolistic
Competition,2019)
In the monopoly market there is a single seller and many buyers . Here also the price of
the product is not determined by the function of demand and supply. The seller here is the price
maker and not the price taker. The price of the product is determined by the seller only. The
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seller can increase and decrease the price of that commodity and there will not be any effect on
the demand of the product as the buyers have no substitute of that product and the seller being
the single seller can modify the price level of that product. In the monopoly market the seller
increases the price of the product than also the buyers buy that product at high prices because
they have no other substitutes(Nikaido, 2015). As in the monopoly market the products are sold
which requires special treatment, there are barriers by the government to enter such market. If
the company Polo Mints is a single seller and in the monopoly market than the increase and
decrease in price level will not effect the demand of the product as there is no other seller in the
market, so the buyer it bound to purchase the Polo Mints of the company in UK.
Illustration 6: Monopoly market
(Source:Monopoly,2019)
In the market of oligopoly there are equal sellers and buyers as a perfect competition
market but in this market few the sellers dominate the market. There are many small sellers
which are being dominated by the large sellers. The price of the commodity or the services are
determined by the action of the competitors , the sellers wait to see the change in the price by the
rival so to see the change in the increment or decrement of the buyers by the change. This
stretchy is used by the firms to fix the prices for its product(Auer and Schoenle, 2016). Also as
there is a high competition there is lessor entry of suppliers because the existing suppliers have
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so strong command on the market. In this market the advertisement cost is the more because
there is a competition to survive by selling more products. If the company Polo Mints is in a
oligopoly competition than it have to change the price through the study of the change in price
by the competitors and not by the demand and supply forces(Nikaido, 2015).
Illustration 7: Oligopoly market
(Sources:Oligopoly,2017)
CONCLUSION
With this conclude that demand and supply are the key factors which effects the price of
the commodity and the quantity so supplied. With the increase in the quantity demanded and
price remaining the same there is rightward shift of the demand curve and vice versa. Also with
the increase in the supply of a commodity supply curve shifts rightward and vice versa. With
studied that the equilibrium price and the equilibrium quantity is the price and quantity on which
sellers agrees to sell and buyer is willing to buy. Furthermore, factors effecting the price of the
commodity. The various market structures- monopolistic market, monopoly market, oligopoly
market and perfect competition market. If there is perfect competition in the market the prices
are determined by the market forces that is demand and supply in the economy. These market
structures influence the price of a commodity in the market. Therefore the company Polo Mints
uses the various market structures to determine the price of the product.
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REFERENCES
Books and Journals
Auer, R. A. and Schoenle, R. S., 2016. Market structure and exchange rate pass-through. Journal
of International Economics. 98. pp.60-77.
Haaland, J. I. and Venables, A. J., 2016. Optimal trade policy with monopolistic competition and
heterogeneous firms.Journal of International Economics. 102. pp.85-95.
Nikaido, H., 2015. Monopolistic Competition and Effective Demand.(PSME-6). Princeton
University Press.
Ozdemir, O. and et.al., 2016. Economic analysis of transmission expansion planning with price-
responsive demand and quadratic losses by successive LP. IEEE Transactions on Power
Systems. 31(2). pp.1096-1107.
Online
How does supply and demand affect prices on the market.2016. [online]. Available through
<https://www.quora.com/How-does-supply-and-demand-affect-prices-on-the-market>
Monopolistic Competition.2019.[online]. Available
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Monopoly.2019.[online]. Available through
<https://www.economicsonline.co.uk/Business_economics/Monopoly.html>
Movement along a Supply Curve and Shifts in Supply Curve.2018.[online].Available
through<https://www.businesstopia.net/economics/micro/supply-curve-movement-shift>
Oligopoly.2017.[online]. Available through
<https://energyeducation.ca/encyclopedia/Oligopoly>
PERFECT COMPETITION.2013. [online]. Available
through<http://vorugantymanagerialeconomics.blogspot.com/2013/12/perfect-
competition.html>
Shift in Demand Curve: Increase and Decrease | Microeconomics.2019.[online].Available
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increase-and-decrease-microeconomics/8936>
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